Lifelong Learning Act Expands Coverdell Accounts, Adds Tax Deduction, But Hikes Penalty to 20%

The new Skills Investment Act of 2025 is set to completely overhaul the Coverdell Education Savings Account (ESA), renaming them Coverdell Lifelong Learning Accounts and shifting their focus from college prep to career upskilling, effective January 1, 2026. This bill’s main purpose is to create a tax-advantaged savings vehicle for adults to invest in their own professional development. The biggest change is that tax-free withdrawals are now allowed for a much broader list of “qualified educational or skill development expenses” for beneficiaries aged 16 and up. This includes things like fees for specific federal workforce training programs, testing fees for certifications, and even the cost of transportation, computer equipment, and internet access used while participating in the training.

The Upskilling Tax Break: Who Benefits?

This act introduces two massive new tax incentives to get people saving and employers contributing. First, if you’re an adult (age 18 or older) contributing to your own Lifelong Learning Account, you can now deduct those contributions from your taxable income. Second, employers get a brand-new tax credit: they can claim 25% of the contributions they make to an employee’s account. This is a huge incentive for companies to fund employee training, though the bill specifies the credit can’t be claimed for contributions made for owners or highly compensated employees. For a small business owner looking to upskill their staff without breaking the bank, that 25% credit is a serious perk.

Retirement-Age Learning and Account Limits

Recognizing that careers aren't linear anymore, the bill dramatically raises the age limit for making contributions to a Lifelong Learning Account from 18 all the way up to age 70. This means a 55-year-old making a mid-career pivot can save tax-free for their training. However, there are new guardrails for older users: if you’re over age 30, new contributions are capped once the total account balance hits $10,000. Additionally, once you hit age 30, you can no longer change the beneficiary of the account to a new person (unless it's due to death or disability). This limits the flexibility for older account holders who might have wanted to pass unused funds to a younger family member.

The Fine Print: Higher Penalties and Tax Complexity

While the expansion is great, the bill also introduces a major stick alongside the carrots. The additional tax penalty for making a non-qualified withdrawal (taking money out for something other than approved education or training) is doubled from 10% to 20%. If you misuse the funds, you'll pay a much steeper price. Furthermore, the new tax deduction creates a complex situation when you eventually withdraw the money. The portion of the withdrawal that equals the amount you previously deducted will be fully taxable. This means if you deducted $5,000 in contributions over the years, that $5,000 comes out fully taxable when you use it. Account holders will need to track their contributions and deductions carefully, making tax time potentially more complicated, especially for those who aren't used to dealing with the complexities of tax-advantaged retirement or savings plans.