Penalties on Withdrawals from a Coverdell Education Savings Account

There are tax penalties for non-qualified withdrawals from a Coverdell education savings account. Non-qualified withdrawals are those that are not withdrawn for qualified educational expenses. The IRS will consider any non-qualified withdrawal to be taxable income. All such withdrawals are subject to income tax on their earnings as well as the 10 percent penalty on early distributions. In the event of the death or disability of the beneficiary, the 10 percent penalty will not apply.

A 6 percent penalty tax is charged on excess contributions (contributions over the legal maximum); this tax will apply to each year that the excess remains. If there are any unused funds in the account when the beneficiary reaches age 30, they must be distributed to him or her as a taxable withdrawal. Rolling these funds over within 60 days to another Coverdell account for a family member under age 30 can preserve their tax-free status.