Update: House and Senate GOP lawmakers announced around midday Wednesday, Dec. 13,2017, that they have agreed on a final tax package. Senate Finance Committee Chairman Orrin Hatch, R-Utah, did not provide any details of what would be included in the deal, deferring to President Trump to decide when the information will be released. So at this point, we still do not know what the effect on Coverdell ESAs might be. – The Editors
As Congress starts down the road to reconciling the separate tax bills passed by the U.S. House and Senate, we are continuing to watch – and wait to see – how that will affect our clients and others who have been investing in Coverdell Education Savings Accounts. As I write this post, Congressional leaders are prepping for a conference committee to reconcile the differing aspects of their tax bills, with the expressed hope of getting a bill to President Trump for his signature before year’s end.
Is This the End of Coverdell Contributions?
At Investment Resource of AZ, LLC, we can transfer existing Coverdell to Coverdell ESAs (with or without LLC) or open a brand-new Coverdell account for our clients to help them save for college expenses in a tax-advantaged way. So, we are keeping a close eye on how a conference committee might approach the House bill’s provision that phases out Coverdell. Under the House proposal, existing Coverdell accounts could remain, but you won’t be able to make any new contributions after 2017. Or you could choose to roll over your Coverdell ESA to a 529 plan.
Currently, families can place up to $2,000 annually in after-tax dollars in a Coverdell account and the money will grow tax-free. The funds can be used to pay K-12 tuition at private, public or religious schools as well as college tuition and certain allowable expenses.
A 529 plan currently allows investments to grow tax-free and are not taxed when used to pay for college tuition and other allowable expenses. Under the House proposal, 529s would be expanded to allow $10,000 for certain K-12 expenses.
Another provision we’re watching is included in both the House and Senate proposals. It would eliminate your ability to change your mind after you’ve converted a Traditional IRA to a Roth IRA. (See this article from attorney Mathew Sorensen, author of The Self-Directed IRA Handbook, for a look at how this Roth IRA re-characterization works – for now.)
Wondering what you should be doing in light of all this?
Sorensen says, “If you’ve used Coverdell accounts or wanted to, make 2017 Coverdell contributions because they may be the last time you can do them. Also, if you’ve been thinking of converting a Traditional IRA to a Roth IRA, 2017 may be the last year you can do so, and still have the ability to re-characterize back to Traditional if you later decide against it.”