Investment & Financial Articles
Title: Tax Treatment for Coverdale IRAs
Author: Tony Novak
Article:
A number of publications, including my own, have mistakenly
reported over the past year that Coverdale IRAs, formerly known
as Education IRAs, are tax deductible. Coverdale IRAs are not
tax-deductible.
Originally the concept of education IRAs was meant to provide a
tax-deductible benefit that would defer taxes on contributions
until the time of withdrawal, but the accounts were limited in
size to only $500 per year. Due to the small allowable account
size, these Education IRAs were not very popular with savers of
financial institutions. Then in 2001 the amount of the allowable
contribution was increased to $2,000 for individuals with an
income up to $95,000 or couples filing jointly with an income up
to $190,000. But the contribution is not deductible from taxable
income for federal income tax purposes in the same manner as a
traditional IRA account.
One possible "work around" to achieve the immediate tax deferral
benefit of deductibility is to make a regular tax deductible IRA
contribution if you qualify, and then make a penalty-free
withdrawal for education purposes in a later year. Education
expenses are one of the special IRA withdrawals allowed that are
exempt from early withdrawal penalties.
This tax issue aspect is separate and distinct from the issue of
tax credits for higher education - known as the lifetime
learning credit and the Hope Scholarship credit. The tax credits
have their own rules. Also, Section 529 tuition plans offer
additional tax deferral alternatives.
One common theme in all of these plans is that upper income
taxpayers cannot effectively use these tools to reduce their
current tax bill. These built-in income limitations plus the
effect of alternative minimum tax rules make these tools
ineffective for current-year planning, but can still have a
significant tax effect over a longer period of time. Upper
income taxpayers should consider the use of various types of
trust accounts for more effective income tax planning strategies.
For more information on this topic, the IRS has a well-written
Publication 970 titled "Tax Benefits for Higher Education. This
is available by calling 1-800-TAX-FORM or on the Web at
www.irs.gov/pub/irs-pdf/p970.pdf.
About the author:
About the Author: Tony Novak, MBA, MT, is a financial adviser
based in Narberth, Pennsylvania. He is editor/publisher of "Tax
and Benefit News" and moderator of the tax forum for financial
planners at "Financial Planning Interactive". He is available by
telephone at 1-877-529-7435 to address public inquiries on tax
and benefit planning issues free of charge through OnlineAdviser
service sponsored by www.MedSave.com and
www.FreedomBenefits.com
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