SecondCor521
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Hi all.
I erroneously made a withdrawal from my son's ESA earlier in 2019 that was in excess of the qualified educational expenses that I had incurred to that point. For the sake of example, assume I had $6K in expenses yet withdrew $9K.
The way I read Chapter 7 of IRS Pub 570 at approximately page 40, if I recontribute the $3K excess into that same son's 529 (aka a QTP), then that re-contribution counts as a qualified educational expense and I won't have to pay any taxes or penalties:
"Contributions to a qualified tuition program (QTP). A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA."
I am planning on doing this just to avoid the taxes and penalties situation on that $3K excess.
My state has a tax deduction for 529 contributions. There does not seem to be any restriction on me taking a deduction this year for this $3K excess re-contribution; all they seem to care about is the fact that I added $3K to his 529 this year.
This brings up the possibility of deliberately removing money from my kids' ESAs and contributing that money back into their 529's and taking the state tax deduction. At Idaho's top rate gets me about 7% of the converted money back, although it can't reduce my taxes owed below zero. (ETA: Although I may not be at Idaho's top rate with this strategy, so the tax savings are less.)
Of course I would have to be fine with the money being in their 529's rather than their ESA's. I don't think I care much; I was planning on draining their ESA's first anyways, and once I drain the ESAs that means fewer accounts to manage, which I like.
Thoughts? Problems? Gotchas? What did I miss?
I erroneously made a withdrawal from my son's ESA earlier in 2019 that was in excess of the qualified educational expenses that I had incurred to that point. For the sake of example, assume I had $6K in expenses yet withdrew $9K.
The way I read Chapter 7 of IRS Pub 570 at approximately page 40, if I recontribute the $3K excess into that same son's 529 (aka a QTP), then that re-contribution counts as a qualified educational expense and I won't have to pay any taxes or penalties:
"Contributions to a qualified tuition program (QTP). A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA."
I am planning on doing this just to avoid the taxes and penalties situation on that $3K excess.
My state has a tax deduction for 529 contributions. There does not seem to be any restriction on me taking a deduction this year for this $3K excess re-contribution; all they seem to care about is the fact that I added $3K to his 529 this year.
This brings up the possibility of deliberately removing money from my kids' ESAs and contributing that money back into their 529's and taking the state tax deduction. At Idaho's top rate gets me about 7% of the converted money back, although it can't reduce my taxes owed below zero. (ETA: Although I may not be at Idaho's top rate with this strategy, so the tax savings are less.)
Of course I would have to be fine with the money being in their 529's rather than their ESA's. I don't think I care much; I was planning on draining their ESA's first anyways, and once I drain the ESAs that means fewer accounts to manage, which I like.
Thoughts? Problems? Gotchas? What did I miss?
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