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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:

The earnings portion of all non-qualified withdrawals will be subject to income tax as well as a 10 percent penalty tax.

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