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A TAXPAYER ASSUMED THE POSITION, AND REGRETTED IT

April 29, 2008

The Wandering Tax Pro has a sad tale of a taxpayer who withdrew from a "Coverdell Education Savings Account," or education IRA, on the mistaken assuption that it could be used to cover pre-school expenses:

What happenned in this case is that each of the children had to file a tax return and report taxable income from the Coverdell ESA. While they did not have to pay federal income tax because of the amounts involved they did have to pay a 10% premature withdrawal penalty on the taxable portion of the distribution.

The Moral? If you are using a tax-favored vehicle, check with your tax pro before you drive it somewhere new.

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