Withdrawals

Q: If a designated beneficiary is enrolled less than full-time at an eligible educational institution, can tax-free withdrawals be taken from a Coverdell ESA to pay qualified education expenses?

A: Yes. Whether the designated beneficiary is enrolled full-time, half-time, or less than half-time, he or she may take tax-free withdrawals to the extent the withdrawals do not exceed the qualified education expenses paid during the tax year.

Q: What happens when a designated beneficiary withdraws assets from a Coverdell ESA to pay for education expenses?

A: Generally, the withdrawal is tax-free to the designated beneficiary to the extent the amount of the withdrawal does not exceed the designated beneficiary's qualified education expenses.

Q: What happens if a designated beneficiary withdraws an amount from a Coverdell ESA that is more than the qualified education expenses paid in the tax year in which the withdrawal was made?

A: Generally, a portion of the withdrawal is taxable to the beneficiary if the withdrawals are more than the beneficiary's qualified education expenses for the tax year. The taxable portion is the amount of the withdrawal that represents earnings that have accumulated tax-free in the account. The taxable portion of the withdrawal is also subject to a 10% withdrawal penalty tax unless an exception applies.

Q: May a designated beneficiary withdraw amounts from a Coverdell ESA and a qualified tuition program in the same tax year?

A: Yes. However, if the aggregate withdrawals from both the Coverdell ESA and the qualified tuition program during the tax year (after any applicable reductions) exceed the designated beneficiary's qualified higher education expenses during the tax year, the designated beneficiary must allocate the expenses among the withdrawals to determine how much of each withdrawal is tax-free. (Generally, the total amount of qualified higher education expenses must be reduced by certain scholarships and educational assistance, and by the amount of such expenses that were taken into account in claiming a Hope Scholarship Credit or Lifetime Learning Credit).

Q: Is a withdrawal from a Coverdell ESA taxable if the withdrawal is rolled over to another Coverdell ESA?

A: Any amount withdrawn from a Coverdell ESA and rolled over to another Coverdell ESA for the benefit of the same designated beneficiary or a member of the designated beneficiary's family** who is under age 30, or is a special needs beneficiary is not taxable. An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the withdrawal.

** Members of the designated beneficiary's family include the designated beneficiary's children, grandchildren, stepchildren, siblings and their children, parents, grandparents, stepparents, aunts, uncles, spouses of all the foregoing, and any first cousin (not his or her spouse) of the designated beneficiary.

Q: What happens to a Coverdell ESA if assets are not used when the designated beneficiary reaches 30?

A: All funds in the account must be distributed to the designated beneficiary 30 days after his or her 30th birthday, unless the beneficiary is a special needs beneficiary. If the assets are not going to be used for the designated beneficiary after he or she attains the age of 30, the balance of the account can be rolled over to a Coverdell ESA for another designated beneficiary who is a qualified family member under the age of 30, or with special needs as described above. Earnings that are withdrawn after the beneficiary reaches age 30 and not rolled over to qualified family members are subject to ordinary income tax and a 10% withdrawal penalty tax.

Q: What happens to any assets remaining in a Coverdell ESA after the designated beneficiary finishes his/her postsecondary education?

A: There are two options. (1) The amount remaining in the account may be withdrawn for the designated beneficiary. The designated beneficiary will be subject to both income tax and a 10% withdrawal penalty tax on the portion of the amount withdrawn that represents earnings to the extent that the designated beneficiary does not have any qualified education expenses in the same tax year in which the withdrawal occurs. (2) If the amount in the designated beneficiary's Coverdell ESA is withdrawn and rolled over to another Coverdell ESA for the benefit of a member of the designated beneficiary's family, the amount rolled over will not be taxable as described above.

Q: Rather than rolling over money from one Coverdell ESA to another, may the designated beneficiary be changed from one child to another without triggering a tax?

A: Yes, provided that the new designated beneficiary is a member of the previous designated beneficiary's family, as indicated above.