DISTRIBUTIONS
If distributions for a year exceed qualified education expenses, the excess is taxable after basis is recovered proportionately from the entire distribution.
Any amount that is taxable also is subject to a 10% penalty, unless it is a distribution made on account of death, disability, or unless the distribution is equal to or less than the amount of scholarship or other tax-free educational assistance received by the account beneficiary.
NOTE: Penalty-free education distributions cannot be made from qualified retirement plans. Qualified plan participants whose plans permit may want to consider transferring funds to a Coverdell IRA for penalty-free educational distribution.
A taxpayer won't be penalized if funds in the account aren't needed for educational purposes because the beneficiary received a scholarship.
Any remaining balance in a Coverdell IRA must be distributed when the beneficiary attains 30 years of age, and any earnings will then be subject to tax and penalty. However, before the beneficiary reaches age 30, the account balance can be rolled over or transferred tax-free to another Coverdell IRA for the benefit of a member of the family of the old beneficiary.
Qualified withdrawals from a Coverdell IRA include those expenses permitted for 529 plans and also include amounts transferred to a 529 plan.**
In any year that an exclusion is claimed for a distribution from an education IRA for a beneficiary, neither a HOPE credit nor a Lifetime Learning credit may be claimed for education expenses all for the same beneficiary. However, the exclusion for distributions from Coverdell IRAs can be waived if the HOPE credit or Lifetime Learning credit would save more tax than the waiver of the exclusion would cost.
For more details, see IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov) or call 800-TAX-FORM (800-829-3676).
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DISCLOSURES:
Please consult with your tax advisor.
* Coverdell ESA - Maximum allowable contributions to a Coverdell ESA are subject to Adjusted Gross Income limitations.
Investments in the plans are subject to market risk and there is no guarantee that funds will be sufficient to cover all college costs.
Please read the offering statement and participation agreement and carefully consider the investment objectives, risk and expenses before investing or sending money.
** 529 Plans - Please read the offering statement and participation agreement and carefully consider the investment objectives, risk and expenses before investing or sending money.
Investments in the 529 plans are subject to market risk and there is no guarantee that funds will be sufficient to cover all college costs.
Investor's home state may only offer favorable tax treatment for investing in a plan offered by such state.
Many tax provisions involving 529 plans are scheduled to expire in 2010 unless extended or made permanent by Congress.
Investor may incur penalties if funds are withdrawn early.
Guarantees and/or payments are based on the claims-paying ability of Issuer and not on the value of the securities within the account.
