topic Re: Coverdell in Get your taxes done using TurboTax

Coverdell

gracemg — Wed, 28 Jun 2023 18:42:28 GMT

Hello,

I have about 36k in my Covedell account. I don't plan on going back to school and I'm currently 28 years old. I'd like to withdraw the money and invest it. My understanding is that I will incur a tax penalty. How much would it be, and is there anything I can do to minimize the penalty?

Re: Coverdell

heidis1 — Wed, 28 Jun 2023 18:57:04 GMT

Hi gracemg,

In general, the designated beneficiary of a Coverdell ESA can receive tax-free distributions to pay qualified education expenses. The distributions are tax-free to the extent the amount of the distributions doesn't exceed the beneficiary's qualified education expenses. If a distribution exceeds the beneficiary's qualified education expenses, a portion of the earnings is taxable to the beneficiary. Amounts remaining in the account must be distributed within 30 days after the designated beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.

If there is a balance in the Coverdell ESA at the time the beneficiary reaches
30 years old, it must be distributed within 30 days. A portion representing earnings
on the account will be taxable and subject to a 10% penalty.

The beneficiary may
avoid this tax and penalty by rolling over the full balance to another Coverdell ESA
for another family member.

If you do take distribution before 30 years of age and do not use on education, then distribution will be taxed at same rate as your ordinary income.

Here is link to help figure your tax bracket:

Tax Bracket Calculator

Hope this helps. Thank you for asking.

Re: Coverdell

gracemg — Wed, 28 Jun 2023 19:57:39 GMT

Thank you for the explanation. So just to be clear, if I distributed it today (age 28) to myself and didn't use on education expenses, I will pay 10% tax penalty and an income tax on the distribution?

Is there any way to reduce the tax penalty?

Re: Coverdell

heidis1 — Wed, 28 Jun 2023 20:13:56 GMT

Yes. If the distribution exceeds education expenses, a portion will be
taxable to the beneficiary and will be subject to a 10% tax penalty. Exceptions to the
penalty include death, disability or if the beneficiary receives a qualified scholarship.

Here is a link from IRS:

IRS TAX TIP 2003-38 COVERDELL EDUCATION SAVINGS ACCOUNTS

Hope this helps. Thank you for responding.