Distributions

The designated beneficiary of a Coverdell ESA can take a distribution at any time. Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified edu- cation expenses (AQEE) (defined later) the beneficiary has in the same tax year.

See Table 6-3 for highlights.

Publication 970 (2025) Chapter 6 Coverdell Education Savings Account (ESA) 43

Table 6-3.

Coverdell ESA Distributions at a Glance

Don’t rely on this table alone. It provides only general highlights. See the text for

Adjusted qualified education expenses (AQEE). To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Tax-free educational assistance includes:

• The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• Veterans’ educational assistance (see Veterans’ Ben- efits in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap-

ter 1);

• Employer-provided educational assistance (see chapter 10); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your AQEE.

Tax-Free Distributions

Generally, distributions are tax free if they aren’t more than the beneficiary’s AQEE for the year. Don’t report tax-free distributions (including qualifying rollovers) on your tax return.

Taxable Distributions

A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary’s AQEE for the year.

Excess distribution. This is the part of the total distribution that is more than the beneficiary’s AQEE for the year.

Earnings and basis. You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2025. The amount of your gross distribution will be shown in box 1. For 2025, instead of dividing the gross distribution between your earnings (box 2) and your basis (amount already taxed) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2025. This will be shown in box 7.

The amount contributed from survivor benefits (see Military death gratuity, earlier) is treated as part of your basis and won’t be taxed when distributed.

Figuring the Taxable Portion of a Distribution

The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Figure the taxable portion for 2025 as shown in the following steps.

1. Multiply the total amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2024, plus total contributions for 2025, and the denominator (bottom part) is the value (balance) of the account at the end of 2025 plus the amount distributed during 2025.

2. Subtract the amount figured in (1) from the total amount distributed during 2025. The result is the amount of earnings included in the distribution(s).

3. Multiply the amount of earnings figured in (2) by a fraction. The numerator (top part) is the AQEE paid during 2025, and the denominator (bottom part) is the total amount distributed during 2025.

4. Subtract the amount figured in (3) from the amount figured in (2). The result is the amount the beneficiary must include in income.

The taxable amount must be reported on Schedule 1 (Form 1040), line 8z.

Example. You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2025. There were no contributions in 2025. This is your first distribution from the account, so your basis in the account on December 31, 2024, was $1,500. The value (balance) of your account on December 31, 2025, was $950. You had $700 of AQEE for the year. Using the steps in Figuring the Taxable Portion of a Distribution , earlier, fig- ure the taxable portion of your distribution as follows.

44 Chapter 6 Coverdell Education Savings Account (ESA) Publication 970 (2025)

1. $850 (distribution)

Total QHEE . . . . . . . . . . . . . . . . . . . . . . . . . . $5,800 Minus: Tax-free educational assistance . . . . . . - 1,500 Minus: Expenses taken into account in

figuring American opportunity credit . . . . . . . ^{− 4,000}

x

$1,500 basis + $0 contributions

$950 value + $850 distribution

= $708 (basis portion of distribution)

2. $850 (distribution) - $708 (basis portion of distribution) = $142 (earnings included in distribution)

Equals: Adjusted qualified higher education

expenses (AQHEE) . . . . . . . . . . . . . . . . . . . $ 300

3. $142 (earnings)

x

$700 AQEE

$850 distribution

= $117 (tax-free earnings)

4. $142 (earnings) - $117 (tax-free earnings)

= $25 (taxable earnings)

You must include $25 in income as distributed earnings not used for qualified education expenses. Report this amount on Schedule 1 (Form 1040), line 8z, listing the type and amount of income.

Worksheet 6-3, at the end of this chapter, can help you figure your AQEE, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s).

Coordination With American Opportunity and Lifetime Learning Credits

The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren’t used for both benefits. This means the beneficiary must reduce qualified higher education expenses (QHEE) by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit.

Example. In 2025, during your first year in college you had $5,800 of QHEE. You paid your college expenses from the following sources.

Partial tuition scholarship (tax free) . . . . . . . . . $1,500 Coverdell ESA distribution . . . . . . . . . . . . . . . 1,000 Gift from parents . . . . . . . . . . . . . . . . . . . . . . 2,100 Earnings from part-time job . . . . . . . . . . . . . . . 1,200

Of the $5,800 of QHEE, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Your parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return.

Before you can determine the taxable portion of your Coverdell ESA distribution, you must reduce your total QHEE.

Since the AQHEE ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. The balance in your account was $1,800 on December 31, 2025. Prior to 2025, $2,100 had been contributed to this account. Contributions for 2025 totaled $400. Using the four steps outlined earlier, you figure the taxable portion of your distribution as shown below.

= $32 (tax-free earnings)

4. $107 (earnings) - $32 (tax-free earnings)

= $75 (taxable earnings)

You must include $75 in income (Schedule 1 (Form 1040), line 8z). This is the amount of distributed earnings not used for AQHEE.

Coordination With Qualified Tuition Program (QTP) Distributions

If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary’s AQEE, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. The following two examples illustrate possible allocations.

Example 1. In 2025, you graduated from high school and began your first semester of college. That year, you had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of QHEE for college. Your QESEE doesn’t include tuition. To pay these expenses, you withdrew $800 from your Coverdell ESA and $4,200 from your QTP. No one claimed you as a dependent, nor were you eligible for an education credit. You didn’t receive any tax-free educational assistance in 2025. You must allocate your total qualified education expenses between the two distributions.

1. You know that tax-free treatment will be available if you apply your $800 Coverdell ESA distribution toward your $1,000 of qualified education expenses for

2. $1,000 (distribution)

x

$2,100 basis + $400 contributions

$1,800 value + $1,000 distribution

= $893 (basis portion of distribution)

2. $1,000 (distribution) - $893 (basis portion of

distribution)

= $107 (earnings included in distribution)

3. $107 (earnings)

x

$300 AQHEE

$1,000 distribution

Publication 970 (2025) Chapter 6 Coverdell Education Savings Account (ESA) 45

high school. The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free.

2. Next, you match your $4,200 QTP distribution to your $3,000 of QHEE, and find you have an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). You can’t use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses are not high school tuition expenses and don’t qualify a QTP for tax-free treatment.

3. Finally, you figure the taxable and tax-free portions of your QTP distribution based on your $3,000 of QHEE. (See Figuring the Taxable Portion of a Distribution in chapter 7 for more information.)

Example 2. Assume the same facts as in Example 1 , except that you withdrew $1,800 from your Coverdell ESA and $3,200 from your QTP. In this case, you allocate your qualified education expenses as follows.

1. Using the same reasoning as in Example 1, you match $1,000 of your Coverdell ESA distribution to your $1,000 of QESEE—you have $800 of your distribution remaining.

2. Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, you allocate your $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total).

$3,000 x

$800 ESA distribution

$4,000 total distribution

= $600 QHEE (ESA)

$3,000 x

$3,200 QTP distribution

$4,000 total distribution

= $2,400 QHEE (QTP)

3. You then figure the taxable part of the following.

a. Coverdell ESA distribution based on qualified edu cation expenses of $1,600 ($1,000 QESEE + $600 QHEE). See Figuring the Taxable Portion of a Distribution , earlier, in this chapter.

b. QTP distribution based on their $2,400 of QHEE

(see Figuring the Taxable Portion of a Distribution in chapter 7).

The above examples show two types of allocation

TIP between distributions from a Coverdell ESA and a

QTP. However, you don't have to allocate your ex- penses in the same way. You can use any reasonable method.

Losses on Coverdell ESA Investments

For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a Coverdell ESA, you can’t deduct the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your

unrecovered basis. Your basis is the total amount of contributions to that Coverdell ESA.

Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you must also pay a 10% additional tax on the amount included in income.

Exceptions. The 10% additional tax doesn’t apply to the following distributions.

1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

2. Made because the designated beneficiary is disabled. A person is considered to be disabled if proof is provided showing there is a physical or mental impairment that substantially limits any gainful activity. A physician must determine that the person’s condition can be expected to result in death or to be of long-continued and indefinite duration.

3. Included in income because the designated beneficiary received:

a. A tax-free scholarship or fellowship grant (see

Tax-Free Scholarships and Fellowship Grants in chapter 1);

b. Veterans’ educational assistance (see Veterans’

Benefits in chapter 1);

c. Employer-provided educational assistance (see

chapter 10); or

d. Any other nontaxable (tax-free) payments (other

than gifts or inheritances) received as educational assistance.

This exception applies only to the extent the distribution isn’t more than the scholarship, allowance, or payment.

4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn’t exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier).

6. Made before June 1, 2026, of an excess 2025 contribution (and any earnings on it). The distributed earnings must be included in gross income for the year in which the excess contribution was made.

Figuring the additional tax. Use Part II of Form 5329 to figure any additional tax. Report the amount on Schedule 2 (Form 1040), line 8.

46 Chapter 6 Coverdell Education Savings Account (ESA) Publication 970 (2025)

When Assets Must Be Distributed

Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs.

1. The designated beneficiary reaches age 30. In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. However, this rule doesn’t apply if the beneficiary is a special needs beneficiary.

2. The designated beneficiary dies. In this case, the remaining assets must generally be distributed within 30 days after the date of death.

Exception for Transfer to Surviving Spouse or Family Member

If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. (“Family member” was defined earlier under Rollovers .) This means the spouse or other family member can treat the Coverdell ESA as their own and doesn’t need to withdraw the assets until they reach age 30. This age limitation doesn’t apply if the new beneficiary is a special needs beneficiary. There are no tax consequences as a result of the transfer.

How To Figure the Taxable Earnings

When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. You determine these earnings as shown in the following two steps.

1. Multiply the amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2024 plus total contributions for 2025, and the denominator (bottom part) is the balance in the account at the end of 2025 plus the amount distributed during 2025.

2. Subtract the amount figured in (1) from the total amount distributed during 2025. The result is the amount of earnings included in the distribution.

For an example, see steps 1 and 2 of the Example under Figuring the Taxable Portion of a Distribution , earlier.

The beneficiary or other person receiving the distribution must report this amount on Schedule 1 (Form 1040), line 8z, listing the type and amount of income.

Worksheet 6-3 Instructions.

Coverdell ESA—Taxable Distributions and Basis

Line G. Enter the total distributions received from all Coverdell ESAs during 2025. Don’t include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Also, don’t include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made.

Line 2. Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2024, is the total of:

• All contributions to this Coverdell ESA before 2025, minus

• The tax-free portion of any distributions from this Coverdell ESA before 2025.

If your last distribution from this Coverdell ESA was before 2025, you must start with the basis in your account as of the end of the last year in which you took a distribution. For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. For years after 2001, you can find that amount by using the ending basis from the worksheet in Pub. 970 for that year. You can determine your basis in this Coverdell ESA as of December 31, 2024, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2025.

Line 4. Enter the total distributions received from this Coverdell ESA in 2025. Don’t include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period).

Also, don’t include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions.

Line 7. Enter the total value of this Coverdell ESA as of December 31, 2025, plus any outstanding rollovers contributed to the account after 2024, but before the end of the 60-day rollover period. A statement should be sent to you by February 2, 2026 (January 31 falls on a Saturday), for this Coverdell ESA showing the value on December 31, 2025.

A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. An outstanding rollover is any amount withdrawn within 60 days before the end of 2025 (November 2 through December 31) that was rolled over after December 31, 2025, but within the 60-day rollover period.

Publication 970 (2025) Chapter 6 Coverdell Education Savings Account (ESA) 47

Worksheet 6-3. Coverdell ESA—Taxable Distributions and Basis

Keep for Your Records

How to complete this worksheet.

• Complete Part I, lines A through H, on only one worksheet.
• Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs.
• Complete Part III, the Summary (line 16), on only one worksheet.

Caution. If you had a distribution from a qualified tuition program (QTP), see Coordination With Qualified Tuition Program (QTP) Distributions .