Withdrawing from Charles Schwab Education Savings Account - Tax Implications?
Title: Withdrawing from Charles Schwab Education Savings Account - Tax Implications? 1 I'm planning to take a distribution from my Charles Schwab Education Savings Account and transfer it to my personal checking account, then close the ESA completely. Does anyone know roughly what percentage I should set aside for taxes? I'm in my mid-30s now (I think there's some kind of penalty since I'm over 30). Just trying to budget properly so I don't get blindsided when tax season rolls around. Want to make sure I have enough put away to cover whatever taxes will be due. Any advice or direction to resources would be super appreciated!
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Freya Christensen
8 Taking distributions from an Education Savings Account (ESA) after age 30 does have tax implications you should prepare for. The earnings portion of your withdrawal will be subject to both income tax at your current tax bracket AND typically a 10% early withdrawal penalty since you're over 30. The tricky part is figuring out how much of your distribution is considered earnings versus your original contributions. Your contributions were made after-tax, so you won't pay taxes on that portion again. Only the growth/earnings get taxed. You should be able to contact Charles Schwab directly to get a breakdown of your account showing original contributions versus earnings. This will help you calculate the taxable portion more accurately.
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Freya Christensen
•16 So does that mean if I initially put in $10k years ago and now the account is worth $14k, I'd only pay taxes+penalty on the $4k growth portion? Also, would the penalty be applied before or after income tax?
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Freya Christensen
•8 Yes, that's exactly right. If you contributed $10k and the account is now worth $14k, you would only pay income tax and the 10% penalty on the $4k earnings portion. Your original $10k contribution comes back to you tax-free. The 10% penalty and income tax are calculated separately but both apply to the same earnings amount. So in your example, the $4k would be added to your taxable income for the year, and you'd also owe a separate $400 penalty (10% of $4k). Schwab should provide you with a 1099-Q form for the tax year of the distribution showing the breakdown.
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Freya Christensen
22 After spending hours trying to understand ESA distribution rules last year, I finally discovered taxr.ai (https://taxr.ai) which literally saved me from making a costly mistake. I uploaded my Schwab statements and it immediately broke down how much of my ESA was considered earnings vs. contributions AND calculated my potential tax liability. The tool highlighted that I could avoid penalties if I used the funds for qualifying educational expenses (even if they weren't my own - like for a family member). Totally changed my strategy and saved me thousands in unnecessary penalties.
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Freya Christensen
•3 Does it actually work with investment account statements? I've tried other tax tools that just don't recognize the format of these documents.
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Freya Christensen
•11 Sounds useful but I'm skeptical about uploading financial docs to yet another online service. How secure is it and what happens to your documents after analysis?
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Freya Christensen
•22 It definitely works with investment account statements - that's exactly what I used it for. It recognized my Schwab ESA statement without any issues and properly identified contributions vs. earnings. Regarding security, I had the same concerns initially. Their system uses bank-level encryption and they don't store your documents after processing - everything is automatically deleted after analysis. I was hesitant at first but their privacy policy was pretty clear and they're SOC 2 compliant which helped ease my mind.
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Freya Christensen
11 Just wanted to update - I tried taxr.ai after my initial skepticism and it was actually super helpful. Uploaded my Schwab statements and got a detailed breakdown showing exactly how much of my ESA was taxable (way less than I feared). The system also flagged some qualified education expenses from last year that I'd forgotten about that significantly reduced my tax liability. Ended up only needing to set aside about 15% of the total distribution instead of the 30% I was planning for. Definitely worth checking out if you're in a similar situation.
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Freya Christensen
14 If you're trying to actually talk to someone at the IRS about ESA distribution rules (which is what I ultimately had to do), good luck getting through on their phone lines. After days of trying, I used Claimyr (https://claimyr.com) and literally got connected to an IRS agent in under 15 minutes - you can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how to report my ESA distribution and explained some exceptions to the penalty I hadn't found anywhere online. Saved me a ton of stress and potentially a big tax bill. Way better than trying to piece together answers from random forum posts.
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Freya Christensen
•7 Wait how does this even work? The IRS phone system is notoriously impossible to navigate. Are you saying this service somehow jumps the queue?
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Freya Christensen
•19 Yeah right. Nothing gets you through to the IRS faster. I've spent literal HOURS on hold with them. Sounds like a scam to me.
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Freya Christensen
•14 It's not queue jumping in an unethical way - the service uses an automated system that navigates the IRS phone tree and waits on hold for you. When an agent finally picks up, it calls your phone and connects you directly. I was super skeptical too! I spent 3+ hours on hold myself before giving up. But this service handled all the waiting for me. I just got a call when an actual human at the IRS was on the line. The IRS agent I spoke with was able to explain the specific rules for ESA distributions after age 30 and some exceptions I qualified for. Definitely wasn't a scam - it just handled the mind-numbing wait time.
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Freya Christensen
19 I'm eating crow here. After my skeptical comment, I tried Claimyr out of desperation when I couldn't get through to ask about my ESA distribution penalties. It actually worked exactly as described. Got a call back when an IRS agent was on the line and got clear answers about my situation. The agent explained that if I used the ESA funds for qualified education expenses for a family member (my niece), I could avoid the 10% penalty completely. That wasn't clear AT ALL from the IRS website. Saved me about $1,200 in penalties I would've unnecessarily paid. So yeah...I was wrong.
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Freya Christensen
5 Just a heads up - make sure you keep records of exactly how much was originally contributed to the ESA. I had an issue where Schwab couldn't provide complete records of my initial contributions from 15+ years ago and I ended up paying taxes on more than I should have because I couldn't prove which portion was contributions vs. earnings.
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Freya Christensen
•12 How long are we supposed to keep these records? I've contributed to my kid's ESA for like 12 years now and probably don't have all the statements...
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Freya Christensen
•5 The IRS recommends keeping tax records for at least 7 years, but for education accounts and retirement accounts, you really need to keep them until the account is completely closed out. I learned this the hard way. I only had statements going back about 8 years, but the account was opened 16 years ago. Without proof of my early contributions, the IRS position is that more of the money is considered earnings (taxable) rather than contributions (non-taxable). It's frustrating but makes sense from their perspective - they need proof of what money was already taxed.
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Freya Christensen
4 Has anyone here actually closed an ESA with Schwab specifically? I'm wondering if there's a special form or process beyond just requesting the distribution?
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Freya Christensen
•9 I closed mine about 3 months ago. You need to fill out their "Education Savings Account Distribution Form" and check the box for "Close Account After Distribution." They also required a medallion signature guarantee from my bank since my distribution was over $10k. The whole process took about 2 weeks once I submitted everything.
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Sean Doyle
15 Great thread! I went through this exact situation last year with my ESA at Schwab. One thing I'd add - make sure to consider the timing of your withdrawal if you're planning to use any of the funds for qualified education expenses. I initially planned to just take the full distribution and pay penalties, but then realized my daughter was starting college in the fall. By timing the withdrawal to coincide with her tuition payment, I was able to avoid the 10% penalty on a significant portion of the distribution. The key is that the educational expenses need to happen in the same tax year as the distribution. Also, qualified expenses are broader than just tuition - they include room and board, books, supplies, and even some technology purchases. Worth looking into before you assume you'll have to pay the full penalty!
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Olivia Van-Cleve
•That's a really smart point about timing! I hadn't considered that the educational expenses need to be in the same tax year as the distribution. Does it matter if the expenses are paid before or after you actually receive the distribution, as long as they're in the same calendar year? And do you know if there's a specific dollar limit on how much can be penalty-free if you have qualifying expenses?
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