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If a distribution is taken from a Coverdell education savings account (ESA), the amount will not be taxed to the extent that it does not exceed the beneficiary's qualified higher education expenses. For this purpose, qualified expenses include tuition, fees, books, supplies and equipment, and if the child is at least a half-time student, up to $2,500 each year for room and board. Virtually any accredited postsecondary educational institution will qualify. Beginning in 2002, accounts may also be used for elementary and secondary education expenses.
If the distribution does exceed the child's educational expenses, the excess portion of the distribution will be taxable to the child to the extent that it represents the tax-free earnings on the account (the original contributions will be recovered tax-free). In addition, a 10 percent additional tax will apply to the taxable portion of the distribution, unless the distribution was made because of the beneficiary's death, disability, or because the beneficiary received a scholarship or some other nontaxable education benefit (such as employer-paid benefits). If the beneficiary dies, the balance must be distributed to his or her estate within 30 days.
An ESA can be rolled over to a different trustee, so long as the rollover occurs within 60 days of the withdrawal from the original account. Once a rollover is made, you must wait at least 12 months before making another one.
The balance remaining in an ESA must be distributed within 30 days after a beneficiary reaches age 30. To avoid tax on the distribution at age 30 (or indeed at any time) the beneficiary on the account can be changed, with no tax consequences, if the new beneficiary is the child's child or descendent, stepchildren or descendent, sibling or their descendent, parent or grandparent, stepparent, the spouse of any of these family members, or first cousin (beginning in 2002). Starting in 2002, the age limit is waived for beneficiaries with special needs (i.e., those with physical, mental, or emotional conditions, including learning disabilities.
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