Yes. If money is withdrawn from a Coverdell Education Savings Account (ESA) and not used for qualified education expenses, the earnings portion of the distribution is included in the beneficiary’s taxable income and is generally subject to a 10% additional tax.

Qualified education expenses for a Coverdell ESA include a wide range of primary, secondary, and postsecondary costs. These may include tuition, fees, tutoring, books, supplies, equipment, room and board (for eligible students), uniforms, transportation, computers, and internet access used during the beneficiary’s years of enrollment.

Coverdell ESA funds must typically be used by the time the beneficiary turns 30. Any remaining balance must be distributed within 30 days after that birthday unless the beneficiary has special needs.

How to Avoid Taxes and Penalties

Taxes and penalties can be avoided by rolling the funds into another Coverdell ESA for the same beneficiary or for a qualifying family member who is under age 30. These rollovers are tax-free.

Families may also roll over Coverdell ESA funds into a 529 college savings plan for the same beneficiary without triggering taxes or penalties, providing additional flexibility if education plans change.