How are distributions taxed?
Qualified distributions (those used to pay qualified education expenses ) are free of tax for both the principal and earnings distributed. Nonqualified distributions are subject to tax on the earnings plus a 10% penalty unless they are made on account of death, disability, or funding of a scholarship (payment to a state tuition program) for the beneficiary. At the death of a beneficiary, a transfer of an account to the surviving spouse is tax free. A transfer to any other person creates a taxable event. Distributions must occur within 30 days after the death of the account beneficiary. Funds still remaining in the account when the beneficiary finishes school or reached age 30 may be withdrawn subject to tax and penalty or rolled over to an education IRA for a member of the beneficiary’s family. Family members may include a son, daughter, stepson, stepdaughter, brother, sister, father, mother, stepfather, stepmother, nephew, niece, uncle, aunt, mother-in-law, father-in-law, or sister-in
