What if education costs are less than your Coverdell IRA value?

If the education IRA and 529 plan I have for my son grows in value such that all education expenses are completely covered, what happens with the remainder? If there is a penalty, what is the rate?

Your educational IRA money has to come out by age 30 but the 529 plan has no age limit. Also, the educational IRA can be spent on any education ( high school, grade school, etc.) but the 529 plan can only be spend on college. Therefore, if it looks like you have over-funded:

1. Use the educational IRA on high school and grade school expenses.
2. Spend the educational IRA first.
3. If there is any thing left in the 529 plan when your son finishes college, leave it in there. If you end up needing it for your retirement, spend it last. You will pay income tax and a 10% penalty on any earnings in the account that are withdrawn for non-educational purposes at that time. If you don't need it for your retirement, make your son the successor owner and keep it available for a grandchild or other relative.

Jim KIrby, CPA/PFS, CFP, CFS

Remember that the original contributions were after tax money, so only the earning can be taxed as income and subject to a 10% penalty.

For both funds, you can roll the money to another student (up to a first cousin).

If you withdraw the money and do not spend it on education, you will generally face a 10% penalty on the earnings.

However, you can keep that money available for your son until he turns age 30. Perhaps he wants to go to graduate school, or you can assign the account to a grandchild.