I was just informed by my father of a small Coverdell ESA in my name. Unfortunately, I'm now 34 and am aware that per the tax laws, this account was to be distributed fully by the time I was 30. What I'm trying to figure out is, to go ahead and distribute this now (with penalties, of course), do I need to do anything special or just use the appropriate 1099 and move on? Can I expect any additional penalties because of the elapsed time?
You will get a 1099-Q reporting the distribution to enter on the return and because it was not used for qualifying education expenses the amount is not only taxable there is a penalty added on as well. The program will do this automatically.
I don't recall having seen this particular question before, but I’ll give you my 2 cents: use the 1099-Q and move on. I’m not an expert on Coverdell. There shouldn’t be any additional penalty except the 10%.
I’m surprised that the plan administrator didn’t automatically distribute the money in the year you turned 30. The one wrinkle may be that the tax was due back then and you technically need to file an amended return. But if it was me, I’d just use the 1099-Q this year. You may want to contact the plan administrator for advice.
It is taxable in the year of the distribution not the year you turn 30. https://www.irs.gov/taxtopics/tc310
The reason it is not auto closed/distributed in the year the bene turns 30 is the possibility to roll it to another bene ... read the rules starting on page 50 ... https://www.irs.gov/pub/irs-pdf/p970.pdf