Coverdale distribution

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  • liberty
    Member
    • Dec 2009
    • 79

    #1

    Coverdale distribution

    Just received a phone call from a client. She just turned 30. According to her you have to take Coverdale out when you turn 30. She just received a check from Coverdale set up by her parents when she was young. She is no longer in school. What potion is taxable? Does she have to pay penalty?
  • Rapid Robert
    Senior Member
    • Oct 2015
    • 1982

    #2
    Originally posted by liberty
    According to her you have to take Coverdale out when you turn 30. [...] What potion is taxable? Does she have to pay penalty?
    You probably meant Coverdell, not Coverdale. "What potion is taxable?" Love Potion #9. -- uh, I mean -- Yes, a portion of the earnings are taxable and subject to penalty if distributions are more than beneficiary’s adjusted qualified expenses for the year. See TheTaxBook.
    "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
    "That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe Howard

    Comment

    • New York Enrolled Agent
      Senior Member
      • Nov 2006
      • 1530

      #3
      Originally posted by liberty
      Just received a phone call from a client. She just turned 30. According to her you have to take Coverdale out when you turn 30. She just received a check from Coverdale set up by her parents when she was young. She is no longer in school. What potion is taxable? Does she have to pay penalty?
      IRC 530 (in part)

      (d) Tax treatment of distributions
      (1) In general
      Any distribution shall be includible in the gross income of the distributee in the manner as provided in section 72.

      (4) Additional tax for distributions not used for educational expenses
      (A) In general. The tax imposed by this chapter for any taxable year on any taxpayer who receives a payment or distribution from a Coverdell education savings account which is includible in gross income shall be increased by 10 percent of the amount which is so includible.

      Comment

      • Rapid Robert
        Senior Member
        • Oct 2015
        • 1982

        #4
        Originally posted by New York Enrolled Agent
        in the manner as provided in section 72.
        Having just spent five minutes wandering into the swamp that is Sec 72 and just barely getting back out, I'm curious where, amongst all the rules there about annuities and employer plans, it indicates that the part of the Coverdell distribution that is a return of contributions (basis) is not subject to tax or penalty, only the earnings in excess of qualified expenses.
        "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
        "That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe Howard

        Comment

        • New York Enrolled Agent
          Senior Member
          • Nov 2006
          • 1530

          #5
          RR - see if section 72(e)(9) is what you want

          Comment

          • Rapid Robert
            Senior Member
            • Oct 2015
            • 1982

            #6
            Originally posted by New York Enrolled Agent
            RR - see if section 72(e)(9) is what you want
            Thank you. I should have used the ctrl-F search for "coverdell".
            "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
            "That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe Howard

            Comment

            • Burke
              Senior Member
              • Jan 2008
              • 7068

              #7
              Originally posted by liberty
              . What portion is taxable? Does she have to pay penalty?
              The custodian should give her the information about basis (amt paid in) and earnings. They can do it now if she contacts them, or they will report it to the IRS and the taxpayer at the end of the year. The earnings are what is taxable, and they are also subject to penalty if not used for educational purposes.

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