The non-college withdrawal rules on the Coverdell ESA fall somewhere between the Section 529 plan rules and he UGMA / UTMA rules. They are considered a gift to that child but can be rolled over to another child if the first doesn’t have qualifying education expenses by age 30. You don’t have to use this account only for college costs better yet. You can use it for other educational costs before college while you cannot use it for food or clothing like you can with a UGMA account. These costs can include K-12 private school tuition, tutoring, books, school uniforms, and technology (a computer or laptop). So, you’d be better off to take a withdrawal from the account for high school tuition or school uniforms, than to spend the money out of your own pocket in case you are tight on money and have a Coverdeil ESA. The money can be withdrawn completely tax-free in case the money is used for “qualifying” educational expenses. The portion of the distribution that represents a gain is taxed to the beneficiary (child) as income and subject to an additional 10% penalty in case it is not used for qualified education.

Withdrawal rules for different college accounts

In the last few years than into custodial (UGMA / UTMA) accounts over the last decade more money has followed into Section 529 accounts.  It wouldn’t be surprising if some cash strapped parents now wish they could get some of their money back because of that. Luckily, Section 529 accounts were designed to allow parents to retain more control than the UGMA accounts. Someone who has contributed to a Section 529 account can choose to access their money for any reason at any time. They do not have to worry about explaining it to anyone, and it does not have to be for the benefit of the child. Money that is withdrawn from a Section 529 plan that is not used for higher education expenses will be subject to a 10% penalty and income tax on the profits. For example, you’d have a $5,000 profit in case you put $10,000 into a Section 529 plan that is now worth $15,000. If that entire amount is withdrawn for non-college purposes, you’d have to pay income tax and a 10% penalty on the $5,000 gain. The underlying investment may charge you a surrender fee in addition to this. You’ll likely get hit with a surrender penalty in case you were sold a Section 529 Plan by a full-service stockbroker and you have “B” or “C” class mutual fund shares. Section 529 plans are considered one of the best options for saving for a child’s college education. They are called “Section 529” plans after the specific IRS code that permits their use. There are two types of Section 529 plans: savings accounts and prepaid tuition plans. This article specifically reviews Section 529 savings accounts.

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