Coverdell/ 529 withdrawals for a non-US Institute

Forum|Forum|3 years ago
April 4, 2023
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Hi,

My child (age 23) is considering attending a top foreign fashion institute for 4 years, but it is not listed on the Department of Education’s list of participating schools for financial aid. I've saved into a Coverdell and a 529 for years, and now I read that to make a deduction from a Coverdell to pay for tuition, the school must be on the list.

Is this true?

If so, what are our options to use the Coverdell money to pay for expenses there? Does the restriction only apply to tuition, or can we at least pay for the expenses related to the school (materials, rent, food, etc)? The school's tuition is low enough that we would not need any financial aid, and we actually have enough saved in the Coverdell to pay all four years of tuition and expenses.

It's always been the plan to avoid financial aid and rely solely on the Coverdell, and now it seems like if we tap it -- even to pay legit higher educational expenses -- we will either have penalties or taxes, or both. We won't have a 1098-T, but I heard that is not needed even for a US school (is this true also?).

Does it help if we transfer the account to a 529 plan? (i.e., are the rules the same for those accounts?)

Any help to navigate this issue or to help us understand penalties/taxes, etc is greatly appreciated.

It seems a shame to have saved so diligently and not be able to use the money as intended.

Best answer by AmyC

1. Yes. If you choose to use the funds on education expenses that are not qualified, you will pay tax on the earnings. Some foreign institutes do qualify. Otherwise, you can move funds to another beneficiary.

2. You have already paid tax on the dollars you put into the program at the federal level and maybe the state level. Those already taxed dollars are your basis. You won't pay tax on them again. The earnings will be taxable.

3. The child can pay if they are the owner. See the rules here.

4. Talk to your plan administrator, you may be able to transfer to your student depending on a few factors.

5.Her being a dependent does not affect which of you claims the excess income. Her dependency would only matter if you were getting the education credit.

6. There is a $35,000 cap for 2023 of the amount you can roll into a ROTH IRA for your child. See other time and age limits here.

MAK70

Unfortunately, if it is not a qualified educational institution, you will not be able to use the 529/Coverdell plan tax free.

In general, the designated beneficiary of a Coverdell ESA can receive tax-free distributions to pay qualified education expenses. The distributions are tax-free to the extent the amount of the distributions doesn't exceed the beneficiary's qualified education expenses. If a distribution exceeds the beneficiary's qualified education expenses, a portion of the earnings is taxable to the beneficiary.

scotttigerAuthor

Thank you, MaryK4.

So, now it seems I still must tap those funds to pay for the education or move them to another child.

If the former, what is the tax basis? I already paid tax on the money going in. How do we figure it out how much to pay on the rest?

Is there a way the child can pay the tax based on his/her tax situation or rate? Can I transfer the account to the child? This child has actually not been a dependent on my tax form for the past few years, but I had planned to have this child as a dependent this year. If she is not a dependent, will that help to avoid taxes at my rate?

If I were to hold the money in the account until the child reaches 30, then is it taxed or is it rolled into a retirement account?

This is all so discouraging. I have this great big chunk of money that I just don't know the best way forward regarding it. Who knew when we planned for education that the child would choose an institution outside of the country to pursue a degree?

AmyCAnswer

Employee

3. The child can pay if they are the owner. See the rules here.

4. Talk to your plan administrator, you may be able to transfer to your student depending on a few factors.

5.Her being a dependent does not affect which of you claims the excess income. Her dependency would only matter if you were getting the education credit.

6. There is a $35,000 cap for 2023 of the amount you can roll into a ROTH IRA for your child. See other time and age limits here.

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