ESA question

Forum|Forum|5 years ago
September 9, 2020
2 replies
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My 13 year old son who is disabled had an ESA established for him many years ago through HD Vest. This type of account is no longer administered by HD Vest, and the funds now reside with FirstClearing. I can't move this money to another place where I have retirement accounts, as they do not administer this type of fund either. I now have a deadline in a week to decide, as they can't hold on to these funds any longer.

My question is what are the tax consequences of just liquidating this fund? It is roughly $10K. It would certainly be easiest, but not if it's some enormous penalty.

Bsch4477

Employee

You would have to separate your cost basis in the account from the earnings in the account. The earnings is taxed at your tax bracket and a 10% penalty would be applied to that portion of the withdrawal.

There are exceptions if the beneficiary is disabled and can’t attend school.

I believe TDAmeritrade accepts ESA accounts.

Carl11_2

Employee

TDAmeritrade does manage ESA accounts. For details see their website at https://www.tdameritrade.com/account-types/education.page

If you can just do a transfer of some type, then you can avoid not only the penalties, but the taxes too.

Hal_Al

Employee

A contribution to a 529 plan is considered a qualified education expense, just like money that was spent for tuition or other costs of education. That means you can take money out of a Coverdell account and put it in a 529 plan without paying tax. Any financial institution that does 529 plans should be able to help you with the details. The earnings "transfer over" to the 529 plan so they'll be treated as earnings when money comes out of the 529 plan.

For details on how to enter in TurboTax, see https://ttlc.intuit.com/community/taxes/discussion/we-rolled-funds-out-of-my-son-s-coverdell-esa-account-last-year-and-deposited-them-into-a-529/00/599898

This is an old post. the comment about not being able to use this money for primary or secondary education, or for computer expenses is no longer true for 529 plans