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Beginner's Guide to a Coverdell Account (ESA)

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Withdrawal Rules and Treatment of Unused Funds for a Coverdell Account (ESA)

Withdrawal Rules:

There are no taxes or penalties on withdrawals made to fund educational expenses, as long as the withdrawal doesn’t exceed the actual amount of expenses. If excess funds are withdrawn, a portion will be subject to taxation and penalties.

Treatment of Unused Funds:

If funds remain unused, they must be distributed to the named beneficiary on the account by 30 days after the child’s 30th birthday.

To avoid this, the IRS permits the funds to be transferred into another Coverdell ESA for someone related to the first beneficiary, who is under 30 years of age. Related parties include: immediate family members of the original beneficiary, parents, cousins, aunts and uncles, and even in-laws!

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