Common Coverdell ESA Distribution and Portability Questions
By Alexis Gonzalez-del-Valle, CIP, CHSP
Can the designated beneficiary request a distribution from a Coverdell Education Savings Account (ESA)?
Only the responsible individual may request an ESA distribution. However, an election on the ESA application or plan agreement may allow the designated beneficiary (the child for whom the ESA is established) to become the responsible individual upon reaching the age of majority. In that case, the designated beneficiary may request a distribution. The rules concerning the age of majority are based on state law and may vary among states. The financial organization should review its ESA documents to determine who the responsible individual is.
If an ESA distribution is more than the qualified education expenses for the year, can the excess amount be deposited back into an ESA?
The responsible individual may roll over the distributed amount to an ESA if the following requirements are met.
The distribution is rolled over within 60 days after receipt.
No other ESA distributions taken during the last 12 months have been rolled over.
May ESA assets be transferred or rolled over to the designated beneficiary’s Traditional IRA, Roth IRA, or a qualified tuition program (QTP), or vice versa?
The responsible individual may not move ESA assets to or from a Traditional or Roth IRA. The responsible individual may roll over or transfer ESA assets to the designated beneficiary’s QTP, but QTP assets may not be moved to an ESA.
The designated beneficiary no longer needs the ESA assets to pay for qualified education expenses. What options are available for these assets?
The responsible individual may transfer or roll over the assets to a qualified family member’s ESA. Qualified family members include the designated beneficiary’s
spouse;
child, stepchild, adopted child, eligible foster child, or descendant of the child;
brother, sister, stepbrother, or stepsister;
father, mother, stepfather, or stepmother;
uncle or aunt;
niece or nephew;
son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law;
a spouse of any of the individuals mentioned above; and
a first cousin
The new designated beneficiary generally must be under age 30, but the age 30 restriction may be waived for a special needs beneficiary. While the IRS has not provided official guidance defining a special needs beneficiary for ESA purposes, the Conference Agreement notes for EGTRRA indicate that the intent of Congress is to include individuals who need additional time for the completion of their education because of physical, mental, or emotional conditions, including learning disabilities.
As an alternative, the responsible individual may request the distribution of the remaining ESA balance. When a distribution is not used to pay for qualified education expenses, only the portion of the distribution that represents earnings is subject to income tax and may be subject to the additional 10 percent penalty tax, unless the designated beneficiary qualifies for a penalty tax exception. Refer to IRS Publication 970, Tax Benefits for Education, for additional details.
