The Ins and Outs of Education IRAs

Don’t miss the education-saving device that often flies under the radar; it’s especially beneficial if enrolling your kids in private school.

Strategy: Set up a Coverdell Education Savings Account (CESA). Because it operates like an IRA for education purposes, it’s often called the “Education IRA.”

Although the contribution limit pales next to Section 529 plans, CESAs aren’t just for higher education. You can also withdraw amounts tax-free for elementary and secondary school expenses. But now the IRS has imposed a new restriction. The annual contribution limit for CESAs is just $2,000 a year. Also, contributions are phased out for upper-income taxpayers. For 2016, the phase-out begins at $95,000 of modified adjusted gross income (MAGI) for single filers and $190,000 of MAGI for joint filers and ends at $110,000 and $220,000, respectively.

As with IRAs, amounts in a CESA can be rolled over tax-free. For instance, you might transfer amounts in an account for an older child to the account of a younger child who will be entering a private school soon.

New ruling: An individual’s IRA rollovers are limited to just one in any 12-month period.

Now the IRS is extending the one-rollover-per-year restriction to CESAs. Citing the similarity of the legislative language for IRA and CESA rollovers, it says that only one CESA rollover is allowed per individual for any 12-month period. (IRS Program Manager Technical Advice 2016-010)

Tip: If necessary, spread out CESA rollovers over several years.

Business Management Daily | 2016

John Pharr CPA
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