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CamperMom

Coverdell ESA - Withdrawing Money for a Community College Class

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Hello,

We have a Coverdell ESA for our daughter.  She is going to take a community college course soon (while still a high school student) and we want to use the college savings account to pay for the class.  What has been your experience with withdrawing the money?

Do we need to have the check sent directly to the college from the financial company?  Do we have the financial company send the check to us and then we pay the college?  Does the federal government need any special forms at income tax time?

Thank you for your help.

CamperMom

 

 

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Yes. BUT: only the actual tuition can be paid for out of ESA funds without the tax penalty. Check out the IRS' Tax Benefits for Education publication for all the ins-and-outs.

I believe the process is to make a withdrawal from the ESA to your bank account -- not a direct transfer to the college. As I recall, when we used our Coverdell ESA funds for DSs (they were college students, not high school/dual enrollment), we transferred the amount from the ESA to our bank account, and then paid for tuition directly from our bank account. Once you start tapping the ESA, you should receive a 1099-Q form from the IRS to report the annual distribution of ESA funds. As long as the distributions are used to pay only qualified education expenses, whoever is listed as the ESA beneficiary does not pay income tax on those distributions. Any $$ used from the ESA for NON qualified education expenses must be reported as income and is taxed.

BEST of luck with the dual enrollment and ESA adventures! Warmly, Lori D.

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My dd is planning to take an independent study (online) college class--could we use ESA funds for this? 

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1 hour ago, CamperMom said:

Lori, Thank you for the information.  Very helpful.


Glad to help! And -- just a quick reminder that if you pay for the tuition out of pocket and then reimburse yourself from the ESA, it must be just for the amount of the tuition, and it must happen in the same calendar year as when you paid for the tuition. So, a couple of times, we had to pay for the spring tuition at the end of the fall semester, before the new year, so we had to remember and scramble to get the ESA funds in order for them to pay for the tuition -- if we had forgotten and tried to reimburse after the Dec. 31st of that year, we would have had the tax penalty.
 

1 hour ago, maize said:

My dd is planning to take an independent study (online) college class--could we use ESA funds for this? 


I don't know. Are you talking about a high school student? College student? Is the class towards a degree program?

I did find this info, but it doesn't really address your question about online college independent study classes:
"Coverdell funds can be used for certain elementary and secondary school expenses, including tuition and fees for private school (or public school if the family pays to send the child to school out of district in a state without open enrollment policies); books, supplies, and equipment; academic tutoring; special needs services for qualifying beneficiaries; room and board; required uniforms; required school transportation; supplementary items and services required by the school and certain computer technology and equipment."

Edited by Lori D.
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10 hours ago, CamperMom said:

Hello,

We have a Coverdell ESA for our daughter.  She is going to take a community college course soon (while still a high school student) and we want to use the college savings account to pay for the class.  What has been your experience with withdrawing the money?

Do we need to have the check sent directly to the college from the financial company?  Do we have the financial company send the check to us and then we pay the college?  Does the federal government need any special forms at income tax

 

 

 

We used Coverdell funds for dual enrollment expenses for our oldest. The funds went directly into our bank account and we paid the school from there. My husband would call and request the precise amount that was needed.

There are special forms, though we tend to get help with that, so I can't tell you what they are.

9 hours ago, Lori D. said:

Yes. BUT: only the actual tuition can be paid for out of ESA funds without the tax penalty. Check out the IRS' Tax Benefits for Education publication for all the ins-and-outs.

 

I'm not sure that is entirely correct. She won't need room and board, I presume, but I think in some cases it can be covered. I know for a college student room/board is an acceptable use for the funds.

Here's one link that describes (briefly) appropriate use of funds:  https://www.goodfinancialcents.com/how-to-use-a-coverdell-education-savings-account/

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1 hour ago, GoodGrief1 said:

 

I'm not sure that is entirely correct. She won't need room and board, I presume, but I think in some cases it can be covered. I know for a college student room/board is an acceptable use for the funds. Here's one link that describes (briefly) appropriate use of funds:  https://www.goodfinancialcents.com/how-to-use-a-coverdell-education-savings-account/


Thanks for that link. Don't know what to say -- that article's info about the college students appears to be in conflict with what the IRS info, which says that  [ESA] distributions are tax-free to the extent the amount of the distributions doesn't exceed the beneficiary's qualified education expenses" (from IRS Topic 310 on Coverdell ESAs), and that room and board (among other expenses) are NOT "qualified education expenses" <-- quoting from that IRS webpage here:

Expenses that Do Not Qualify

Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses:

  • Room and board
  • Insurance
  • Medical expenses (including student health fees)
  • Transportation
  • Similar personal, living or family expenses

 

🤔🤨🤯 scratching head here...

 

Edited by Lori D.

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It looks like the linked IRS page for qualified education expenses is talking about education credits (like Hope or Lifetime Learning Credit)rather than withdrawals from a Coverdell. Room/board/books are excluded for those credits.

Here's another page that spells it out: https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan

Edited by GoodGrief1
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