IRS Applies IRA Rollover Limit To Coverdell ESAs
Published Tuesday, November 22, 2016 at: 7:00 AM EST
A Coverdell Education Savings Account (CESA) is like an IRA that you use to save for education instead of retirement. Now, in a new technical advisory, the IRS says it is applying a once-a-year rule that limits IRA rollovers to Coverdell ESAs as well.
Annual contributions to a CESA on behalf of a beneficiary—typically a child or a grandchild—are limited to $2,000. Also, CESA contributions are phased out if you earn too much. But investment earnings in the account aren't subject to current tax, and withdrawals used to pay qualifying expenses, for elementary and secondary schools as well as colleges, are exempt from tax.
Moreover, you can transfer assets from a Coverdell ESA to another account—for example, an ESA for a younger child about to enter school—without tax consequences.
You also can make tax-free transfers from one IRA to another—but only once a year. And under a recent rule change, that restriction now applies to any and all IRAs you own. And the IRS is extending the rule to Coverdell ESAs, allowing only one rollover per year per owner.
This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.
An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.
Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
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