5329 Form - for Coverdell

[MNYL]

Hi Experts,

I was told when I removed the excess contribution from Coverdell ESA account for the minor, the form 1099Q will be under the minor's name.  So if I file the Form 5329, I should put under my name and SSN#?  Then 1099Q name won't be matching with the Form 5329.    Kindly confirm.

Thank you so much!

[Hal_Al]

Q. I was told when I removed the excess contribution from Coverdell ESA account for the minor, the form 1099Q will be under the minor's name?

A.  No. The 1099-Q will be in your name.  Confirm that with the plan administrator.

[MNYL]

Thank you Hal_Al!   I called the brokerage again to ask. They said since the minor is the account owner, 1099Q should be in his name.  Since I am the custodian, when I file Form 5329, putting my name and SSN# should work.  Correct?

Any insights from anyone please advise!  Thank you!!

[Hal_Al]

If the child is the account owner (highly unusual), as well as the beneficiary, and the recipient of the 1099-Q, then form 5329 goes on the child's tax return. 

[MNYL]

I am the custodian of the Coverdell ESA account, the account has to be named after the child (so he would be account owner).  So I am not clear if the 1099Q will have my name or his name on.   Since the child doesn't file tax return, when filing the Form 5329, I should be the one filling out that form and putting in my SSN#?  Would IRS know automatically the form is for the child since I would be filling out the part for over contribution to Coverdell ESA?     Please advise as this is not clear.  Thank you!

[DMarkM1]

For Coverdell ESA accounts the parent (custodian) is the owner and the child is the beneficiary.  The account holder/manager of the education program has an obligation to report annual distributions on Form 1099-Q to the IRS and to the beneficiary.  

However, the account owner (such as a parent) will receive a copy of the 1099-Q instead if the distributions from a 529 plan aren’t made directly to the beneficiary or to an educational institution for the benefit of the beneficiary. 

When the beneficiary enrolls in school and starts taking distributions to pay school expenses, he will begin receiving a Form 1099-Q each year. And as long as the distributions are used to pay only qualified education expenses, the beneficiary doesn’t pay income tax on the distributions.

If the distributions are issued to account owner (parent) and the distributions are not used for qualified education expenses, the parent (owner) will enter the 1099Q on their return.  The entries will be made in the "Deductions & Credits" tab in the "Education" section using the "ESA and 529...(Form 1099-Q)" topic.

Here is a link with more information. 

[MNYL]

Hi Experts,

When I try to fill out the Form 5329 for 2019 and 2020 (both years had excess contribution), part V "Additional Tax on Excess Contributions to Coverdell ESAs", I don't see a line asking for earnings from the excess contribution.  Indeed I don't know the amount yet (maybe no earning could be a loss) until the brokerage company calculates and advises later.  

1. Maybe the 6% penalty fee is just for the excess contribution portion and no need to include earnings? 

2. On line 33, additional tax (the 6 % penalty), it asked to "include this amount on Schedule 2
(Form 1040), line 6".   I was told I can file this form alone for the minor beneficiaries.  So I should enter this amount on my 2022 tax return (for both the 2019 and 2020 Form 5329 that I fill out) since I made the penalty payments in 2022?

3. If there is any earning from the excess contribution withdrawal, do I need to report (if yes, where?) or no need due to Coverdell ESA is tax free when I withdraw?

Please advise promptly.  Thank you so much!

[JillS56]

There is a limit on how much can be contributed to a Coverdell ESA account. More than 1 Coverdell ESA can be set up for an individual but the total contribution cannot exceed $2000, no matter how many people contribute to it; otherwise, a 6% excise tax will be applied to any excess amount over $2000 for any individual beneficiary for each year that there is an excess. If you contribute more to a Coverdell ESA than you are allowed in one year, you have until May 31 of the following tax year to withdraw the funds, along with any earnings attributable to the funds. Any overcontributions remaining after this date are subject to a 6% excise tax. 

Yes, you do have to report this on your tax return.  It is reported on Form 5329 and is reported in the year that the excess contribution is withdrawn.  

Any earnings on the amount of the over contributed funds should also be withdrawn and are subject to the 6% excise tax.

Two articles that might answer any additional questions:  Topic 310 - Coverdell ESA and What is Form 5329?