Qualified Deductions from 529 or Coverdell in CA

Forum|Forum|6 years ago
February 18, 2020
1 reply
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So, I got a little surprise when I went to my 529 site to make a withdrawal to pay a portion of my son's religious school: CA law does not consider this a qualified deduction, and earnings are subject to tax + a 2.5% penalty.

I was wondering if deducting from my son's Coverdell account would also inquire the same wrath from CA.

Anyone know?

Thanks.

KrisD15

Level 15

California follows IRS rules for 529 distributions.

The funds used should be for expenses of the beneficiary named on the account.

According to the IRS:

“Eligible educational institution. An eligible educational institution is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other post-secondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited post-secondary institutions meet this definition.”

IRS Pub 970

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scotttigerAuthor

Level 4

Thank you Karen for the timely reply, but I am still confused. This is for private religious high school.

I had read and understood the rules had changed a year or two ago so that money could be withdrawn without penalty or taxes if used for tuition to a religious high school. (Not sure if that was for a 529 or a Coverdell).

On the new scholarshare529.com site, the disclaimer is made that CA doesn't allow the money to be used for these purposes. This was a surprise.

Any details on that?

Thanks,

Scott

DMarkM1

Level 15

California does not conform to the new rules allowing tax free withdrawals for elementary and/or secondary schools. The withdrawal is taxed and there is a 2.5% penalty. Here is a list of non-conforming states and additional information.

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