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Revised IRS Publication Addresses Key Education Savings Accounts, Penalty Exceptions

The IRS just released the updated version of Publication 970, Tax Benefits for Education (For use in preparing 2012 Returns). It discusses a relatively unknown savings account called a Coverdell Education Savings Account (known as a CESA or ESA). An ESA is set up to pay the qualified education expenses of a child or student, known as a designated beneficiary. The contribution is limited to $2,000 per year and generally must be made before the child’s 18th birthday. However, someone whose modified adjusted gross income for the year is more than $110,000 ($220,000 in the case of a joint return) cannot make an ESA contribution. The contributions aren’t tax deductible, but the distributions are tax-free if used for the qualified education expenses of the student. In an ESA, qualified education expenses include not only higher education, but certain expense for kindergarten through high school.

The American Taxpayer Relief Act of 2012 (ATRA) preserved a number of ESA provisions that were set to be expire including:
• allowing prior-year contributions through April 15
• increasing the maximum annual contribution to $2,000
• permitting tax-free distributions for elementary and high school expenses

The Publication also discusses the exception to the 10% early distribution penalty for withdrawals that are used for higher education. Generally, if you take an IRA distribution before age 59 ½, a 10% early distribution penalty applies. This rule applies to all IRAs including Roth, SEP and SIMPLE IRAs. The penalty on an early distribution from a SIMPLE IRA can be as high as 25%.

However, distributions from your IRAs for qualified higher education expenses (not from employer plans) are exempt from the penalty. You may owe income tax on the amount distributed, but you may not have to pay the 10% penalty. You cannot use your IRA penalty-free for elementary and high school expenses; it must be used for higher education expenses only. IRS Publication 970 is available on the IRS website: http://www.irs.gov/pub/irs-pdf/p970.pdf

Article Highlights:
• IRS Publication 970, Tax Benefits for Education, has been revised for 2012
• ATRA (American Taxpayer Relief Act of 2012) preserved many provisions of Coverdell Education Savings Accounts (ESAs) that were set to expire
• IRA distributions before age 59 ½ for higher education expenses are exempt from the 10% early distribution penalty

- By Joe Cicchinelli and Jared Trexler


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Can I transfer money from my IRA to my husband's Roth IRA? I am 35, and he is 36.

Thank you!

Gail Clements

No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.