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of the tax law that made Coverdale/Education IRA's a tax free college savings vehicle, in 2011 the earnings that are withdrawn from that account will be taxable.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.
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