Education Roth Withdrawals

[yakers]

I have a question about education Roth withdrawals. I have a fund set up for this purpose and my son is now in college. The account identifies him as the beneficiary and I am the custodian. Now the situation is that he does not appear on my taxes, he is on my ex-wife's tax return. So is there anything I have to report on my taxes or info to pass on to my ex about withdrawals?Or is this only reported to the iRS on his return? I am assuming IRS would want this reported somewhere.

[FinanceDude]

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Originally Posted by yakers I have a question about education Roth withdrawals. I have a fund set up for this purpose and my son is now in college. The account identifies him as the beneficiary and I am the custodian. Now the situation is that he does not appear on my taxes, he is on my ex-wife's tax return. So is there anything I have to report on my taxes or info to pass on to my ex about withdrawals?Or is this only reported to the iRS on his return? I am assuming IRS would want this reported somewhere.

Withdrawals will be tax free. Whomever is the custodian on the account will notify the IRS that a withdrawal is made, so they are notified that way. A couple of that statement will be sent to you. Do you do your own or use a CPA for taxes??

[yakers]

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Originally Posted by FinanceDude Do you do your own or use a CPA for taxes??

No, Turbo Tax has been good enough for me. I am sure I will get a statement from the custodian but I am assuming it will be interesting with Turbo Tax & the IRS when I show a (tax free) withdrawal for someone who is not listed as my dependent. But this should ultimately work out since various parents, grandparents and others open up EdRoth accounts so there must be a way.

[youbet]

You guys have lost me..... What is an EdRoth account?

[yakers]

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Originally Posted by youbet You guys have lost me..... What is an EdRoth account?

Search Education Roth/Cloverdale Education account. It is a program where you can contribute $2k after tax $ and it accumulated tax free but can only be used for education expenses. I set one up for my younger son some years back and am now in the withdrawal phase and I am not sure about the whole process as to how the withdrawals are reported to IRS and what documentation to maintain (there is no where specified to submit it to) on what actual school expenses were paid for. I figured someone has done this before so I do not have to invent the process.

[youbet]

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Originally Posted by yakers Search Education Roth/Cloverdale Education account. It is a program where you can contribute $2k after tax $ and it accumulated tax free but can only be used for education expenses. I set one up for my younger son some years back and am now in the withdrawal phase and I am not sure about the whole process as to how the withdrawals are reported to IRS and what documentation to maintain (there is no where specified to submit it to) on what actual school expenses were paid for. I figured someone has done this before so I do not have to invent the process.

OK. I'm familar with Cloverdales (have them set up for each of the three grandkids) but never heard them refered to as "EdRoths" before.

I'm still in the contribution stage. The grandkids are 7, 6 and 3. So, I can't speak from actual experience on how to handle withdrawals. I've been assuming the administrator (Schwab in our case) would send a 1099 and TurboTax would help us plug in the numbers to keep it tax free. Also assuming it would be best to have receipts for qualified expenditures!

Two areas about Cloverdales of interest to me......

Grandparents can't own them. We opened it under my son's SS#. I'm still the guy who mails in the checks, but I suppose technically I'm gifting $6k to my son who then funds the 3 Cloverdales.

Several Cloverdale rules expire in 2010. If not extended, the $2k annual contribution will revert to $500 and elementary/highschool expenses will no longer qualify as educational expenses. It'll be interestng to see what Congress does.....

Of course, it's always interesting to see what Congress does......

[Gardnr]

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Originally Posted by yakers Search Education Roth/Cloverdale Education account.

I believe it's Coverdell.

[youbet]

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Originally Posted by Gardnr I believe it's Coverdell.

Yeah, that's right! I'm always calling them Cloverdell ESA's! And I see Yakers does too.....

[youbet]

OK...... Got curious and went and did a little reading.

Publication 970 (2007), Tax Benefits for Education

Handling withdrawals is going to be more complicated that I was hoping, especially if the beneficiary is also involved with educational tax savings such as the Hope incentive or simultaneous withdrawals from 529b plans.

You'll recieve a 1099Q. You determine if any of your ESA withdrawal is taxable (usually because your ESA withdrawal was larger than qualified education expenses reduced by other educational benefits or programs.) Any taxable portion is entered on 1040 Line 21 "Other Income." And, btw, I believe they're saying Line 21 of the beneficiary's 1040, not yours.

I don't really need to know this for a while, so not going to do a deep dive now. But it does look like all the info is there in the publication I attached. For some reason, ESA's don't seem to be very popular, although they have benefits beyond those of a 529b plan. Like you, I'd like to find someone who has actually gone through the withdrawal phase and could comment......

[Gardnr]

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Originally Posted by youbet For some reason, ESA's don't seem to be very popular, although they have benefits beyond those of a 529b plan.

I'm using a 529 because of the state tax deduction I get from MO. It's administered by Vanguard too, so expenses are low.

[youbet]

The state tax deduction was the only advantage I could attribute to a 529b over an ESA..... as long as the $2k ESA annual contribution limit is adequate. In my case, the $6k/yr for the three grandkids is all I can afford, so it works out.

In the case of our extended family, the ESA's also serve as an emergency fund for my son and DIL. If one lost their job, therapies and other expenses for their oldest child's (my oldest grandchild's) special needs could be paid for out of the ESA to help them get by during the period of unemployment. Can't do that with a 529b.

[Gardnr]

Quote:

Originally Posted by youbet The state tax deduction was the only advantage I could attribute to a 529b over an ESA..... as long as the $2k ESA annual contribution limit is adequate. In my case, the $6k/yr for the three grandkids is all I can afford, so it works out. In the case of our extended family, the ESA's also serve as an emergency fund for my son and DIL. If one lost their job, therapies and other expenses for their oldest child's (my oldest grandchild's) special needs could be paid for out of the ESA to help them get by during the period of unemployment. Can't do that with a 529b.

Yep, you really have to assess the pro/cons of each and make a personalized decision on which is best. The flexibility of the ESA is a definite plus.