Due to the expiration of the tax law that made Coverdale/Education IRA's a tax free college savings vehicle, in 2011 the earnings that are withdrawn from that account will be taxable. You would think that congress would have a more long term horizon for college funding options, but this really shows a lack of planning and foresight. I always preferred the Coverdale over the 529 becuase it was more flexible in allowing you to use it towards expenses at a private elementary, middle, or high school, not just college. This will be the death of the Coverdale account though.
So if you are one of those who tried to do the right thing and fund your kid's college education, you do have a few options before the end of the year:
- Spend the money on qualified expenses (tuition and fees to college or K-12, new computer, internet access)
- Roll the Coverdell money into a 529 savings plan, penalty-free, as long as the accounts have the same beneficiary.
If you don't act then the earnings from the account will be taxable when you withdraw them, and you could face a 10% penalty if the earnings aren't used for college expenses.
Source
Here is an excellent website with a description of the many penalties the IRS may levy against a taxpayer, as well as a list of the possible ways you might be able to get the IRS to abate (forgive) those penalties.
Disclaimer
The content on this blog (www.acollinscpa.blogspot.com) is my personal opinion based on my study and understanding of tax laws, policies and regulations. It’s provided for your private, noncommercial, educational and informational purposes only. It’s not a recommendation or endorsement of any company or product. It should not be relied upon as specific tax advice for your personal situation. I strongly suggest that when it comes to filing your taxes, you get additional, professional guidance from individuals who are familiar with your specific circumstances. Those who choose to rely solely upon the information on this site do so at their own risk and peril, and cannot hold the author liable in any form or fashion.
IRS CIRCULAR 230 DISCLOSURE REQUIREMENT: IRS Circular 230 requires us to notify you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed by law.
