Permalink Submitted by Alan Spross on Wed, 2012-05-30 20:26
No, a tax free rollover to a Coverdell or 529 cannot be done. The UTMA funds would have to be converted to cash and that might involve Cap Gains taxes. The cash could then be contributed to a Coverdell ESA (not an IRA, but rather an education savings accounts) subject to the small annual contribution limits. Further, since the funds started in an UTMA account, the Coverdell should be restricted such that the beneficiary cannot be changed from the original UTMA beneficiary.
Whlle the Coverdell earnings would be tax free, distributions are restricted to qualified education expenses, otherwise the gains would be subject to tax and penalty. Conversely, UTMA funds can be used for anything that will benefit the minor, but when the minor reaches majority they have a right to claim the funds and use them for anything subject to taxes on the gains for funds distributed.
Further, there are implications regarding how these accounts may differ with respect to qualification for financial aid for the child.
Permalink Submitted by ChristineW Damico on Thu, 2015-04-09 16:09
I am working with a client on the strategy to contribute funds to a UTMA and then transfer them to a Coverdell. From what I’ve read, this gets around the income limitations attached to the Coverdell as the child is technically contributing to the Coverdell with this strategy. However, our current custodian, Schwab, says this is not allowed. Their rationale is that moving funds from a UTMA and into a Coverdell places greater restrictions on the funds for the child. Is this a legal strategy? If so, is there an IRS publication about it? Does anyone know of a custodian that will allow it?Thanks!
Permalink Submitted by Alan Spross on Wed, 2012-05-30 20:26
No, a tax free rollover to a Coverdell or 529 cannot be done. The UTMA funds would have to be converted to cash and that might involve Cap Gains taxes. The cash could then be contributed to a Coverdell ESA (not an IRA, but rather an education savings accounts) subject to the small annual contribution limits. Further, since the funds started in an UTMA account, the Coverdell should be restricted such that the beneficiary cannot be changed from the original UTMA beneficiary.
Whlle the Coverdell earnings would be tax free, distributions are restricted to qualified education expenses, otherwise the gains would be subject to tax and penalty. Conversely, UTMA funds can be used for anything that will benefit the minor, but when the minor reaches majority they have a right to claim the funds and use them for anything subject to taxes on the gains for funds distributed.
Further, there are implications regarding how these accounts may differ with respect to qualification for financial aid for the child.
Permalink Submitted by ChristineW Damico on Thu, 2015-04-09 16:09
I am working with a client on the strategy to contribute funds to a UTMA and then transfer them to a Coverdell. From what I’ve read, this gets around the income limitations attached to the Coverdell as the child is technically contributing to the Coverdell with this strategy. However, our current custodian, Schwab, says this is not allowed. Their rationale is that moving funds from a UTMA and into a Coverdell places greater restrictions on the funds for the child. Is this a legal strategy? If so, is there an IRS publication about it? Does anyone know of a custodian that will allow it?Thanks!