5. Not spending withdrawals on qualified education expenses
The tax-free earnings growth and tax-free withdrawals offered by a Coverdell ESA only apply when the funds are used to pay for qualified elementary and secondary education expenses (QESEE) or qualified higher education expenses (QHEE). Remember, if you’re using a 529 plan to pay for elementary or high school, your qualified expenses are limited to tuition costs, but QESEE for a Coverdell ESA include:
Tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, supplies, and other equipment which are incurred in connection with the enrollment or attendance of the designated beneficiary
Room and board, uniforms, transportation, and supplementary item and services (including extended day programs) which are required or provided by the school in connection with such enrollment or attendance
Any computer technology or equipment or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school.
The earnings portion of all non-qualified withdrawals will be subject to income tax as well as a 10 percent penalty tax.