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    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?

    #2
    Originally posted by liberty View Post
    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.

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      #3
      Originally posted by liberty View Post
      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.

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        #4
        Originally posted by New York Enrolled Agent View Post
        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.

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

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            #6
            Originally posted by New York Enrolled Agent View Post
            RR - see if section 72(e)(9) is what you want
            Thank you. I should have used the ctrl-F search for "coverdell".

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              #7
              Originally posted by liberty View Post
              . 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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