Losses in Coverdell Accounts

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  • #77454
    robinsd
    Participant

    On this page https://fairmark.com/kids-and-college/coverdell-accounts/earnings-and-losses-in-coverdell-accounts/ it has this to say about losses in Coverdell accounts:

    “The big unanswered question here is this: in the quotation above, who gets to claim the loss? The IRS says “you” may be able to claim the loss, but doesn’t make it clear whether they are talking to the person who created the account or the beneficiary. It seems like they must be talking about the beneficiary, because in all other respects they are treating the beneficiary as the taxpayer for the account. Usually that means the loss will be claimed by a minor, or by a young adult without enough income to secure any real benefit from the deduction. The bottom line here is that you shouldn’t expect to obtain a tax benefit from losses that occur within a Coverdell account.”

    Regarding the bolded sentence, my thought is rather than closing the account when you are done paying educational expenses, leave a token amount in the account and then hold it until the child reaches age 30. At that point, they are more likely to be able to benefit from the tax deduction. Or you might leave all the money in the account, because then it can grow tax free (up to the break even point), again until age 30.

    Am I missing something here?

    #77459
    Kaye Thomas
    Moderator

    I agree, postponing liquidation of the account could make sense, especially now that the deduction has been eliminated for years before 2026. I’ve updated the page you referenced.

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