Coverdell Education Savings Accounts (ESAs) allow you to save money for the education expenses of your designated beneficiary. Regardless of your or your beneficiary's age, you can receive ESA distributions completely tax-free as long they help cover the cost of books, tuition, school supplies, or any other qualified education expenses. Such expenses can be ESA-eligible at any educational level and from any accredited institution (public, private, or religious).
Beneficiary eligibility for Hope and Lifetime Learning Credits will not be affected by tax-free distributions from an ESA, provided you do not attempt to utilize both programs to cover the same expense.
Distributions for non-qualified education expenses will be taxed as income and may bear an additional 10% penalty from the IRS. Any differences between a distributed balance and an expense amount will be taxed as such. For example, if you distribute $5,000 from an ESA having only incurred $4,500 in qualified education expenses, the $500 difference may be subject to taxes and penalties. Exceptions to the 10% penalty may apply.
Remaining cash or assets must be distributed from the ESA within 30 days of the beneficiary's 30th birthday. The same 30-day deadline applies if the beneficiary passes away prior to reaching age 30.
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