What if the designated beneficiary does not use the assets to pay for qualified education expenses?

If a designated beneficiary distributed more from her ESA than the cost of her qualified education expenses for the year, a portion of the distribution will be taxable to her. She must include the earnings attributable to the excess distribution in her gross income for the year, and pay a 10 percent penalty tax on the earnings amount, unless an exception applies (e.g., death or disability).

If the designated beneficiary does not use the ESA assets, or transfer or roll over the ESA assets to a qualified family member by age 30, the ESA is deemed distributed and is subject to taxation if not used for qualified educational expenses.