Coverdell ESA
We have a 24 year old client that lives in Pennsylvania that is the beneficiary on a Coverdell ESA. The client is wondering if they can convert the account to a roth IRA for their benefit?
A 529 distribution would be taxable to the extent of gains in the account if it was not used for qualified education expenses.
the client is 24 and no longer in need of funds for education, that is why we were wondering if we could move it to an ira or roth instead of a 529
Client could wait until the IRS publishes the Regs on the new Secure 2.0 provision which will allow a 529 plan owner to roll over a limited amount to their Roth IRA, but there are several requirements. One is that the 529 plan must have been held 15 years and the total max Roth rollover is 35k. The Coverdell could first be rolled into the 529, but if there is no prior 529, the 15 years is a long time to wait. But it’s at least a planning option.
I know we’re still waiting for the new 529 regs, but I have two questions: 1) if a client has owned the 529 fro more than 15 years, never changed the beneficiary, stopped contributing any funds longer than 5 years ago, BUT did transfer the 529 to a different 529 provider (to qualify of a state tax deduction). Could the IRS view this as beginning a new 15 year clock? and question 2, how would one find out if a state would recognize Secure 2.0 and NOT claw back the deduction? After all, the funds were not Used for the purpose intended. Sorry so long. Thanks
I doubt that the IRS would treat a plan transfer as starting a new 15 year holding period, but it’s possible. We will have to wait for IRS guidance on several aspects of these transfers. Likewise, the states will have to determine how their plans will deal with this provision. It would probably be too difficult to claw back a deduction, particularly an older one, but there might be a couple states that would attempt that.
Permalink Submitted by Alan - IRA critic on Wed, 2023-10-25 14:57
No, but they could roll it into a 529 plan if they wish.
Permalink Submitted by [email protected] on Thu, 2023-10-26 14:29
Hi,With the client rolling the coverdell esa into a 529 would they be able to access the funder for personal use?