If part of a distribution is taxable, in addition to the normal federal income tax that applies, you must also pay a 10% additional tax on the amount you had to include in income. But there are exceptions. The additional 10% tax does not apply on:
Distributions paid after the designated beneficiary’s death,
Distributions made because the beneficiary is disabled,
Amounts that had to be included in income because the beneficiary received tax-free educational assistance,
Distributions made when the designated beneficiary attends a U.S. military academy,
Amounts included in income when coordinating with the Hope or lifetime learning credit,
Distributions made by June 1 of the following year, of excess contributions from the previous year.
If none of the exceptions apply, and you owe the additional 10% tax, you would calculate and report it in Part II of Form 5329.
When the Balance in the Account Must Be Distributed
Any balance remaining in a Coverdell ESA must be distributed within 30 days after:
The designated beneficiary reaches age 30, or
The designated beneficiary dies before reaching age 30.
In the event of the designated beneficiary’s death, the Coverdell ESA can be transferred to the surviving spouse or other family member of the beneficiary who is under age 30.
Taxable Earnings from a Total Distribution
A total distribution made when the designated beneficiary reaches age 30 or dies, is subject to tax on the accumulated earnings in the account. This is the difference between the balance in the account and the basis in the account (total amounts contributed).
The person receiving the distribution would report the earnings as Other Income on Form 1040.