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COVERDELL ESA ACCOUNTS AND FIRST RMD YEAR DISTRIBUTIONS: TODAY’S SLOTT REPORT MAILBAG

Mar 7, 2024

By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport

Question:

Hi Ed,

I have Coverdell ESA accounts for my 5 grandchildren. My question is whether Coverdell ESAs can be treated the same as 529 plans under the new law when it comes to unused funds being eligible for rollover to a Roth IRA.

Answer:

The SECURE 2.0 provision allowing Roth IRA rollovers of unused 529 funds does not cover Coverdell ESA accounts. However, you can do a 60-day rollover or direct transfer of the Coverdell accounts to 529 plans and then roll over any unused funds to a Roth IRA (assuming you meet the requirements for a 529-to-Roth IRA rollover).

Question:

I need your help!  We have a unique situation with a client, Paul, born December 31, 1951. He will be age 73 on December 31, 2024. If Paul takes a distribution from his IRA in October, will that be considered his RMD since he isn’t RMD age until December 31?

Paul’s RMD is almost $50,000 and he would rather not double that up in 2025. So, we want to be sure that any IRA distribution he takes any time during 2024 will qualify as his RMD.

I thought, under the old rules, that an IRA distribution at age 70 did not qualify as an RMD in the year the client turned age 70 ½.  For example, if I turned age 70 in February I would be age 70 ½ in August. If I took a distribution from my IRA in May, did that satisfy my age 70 ½ RMD?

Kathy

Answer:

Hi Kathy,

Any distribution taken in the year someone reaches his first RMD year counts as an RMD for that year. So, if Paul takes a distribution in October 2024 (or anytime in 2024), that will count as a 2024 RMD. The same rule applied under the old rules when the first RMD year was the year someone reached age 70 ½. So, in your example, if you turned age 70 ½ in August of a particular year, a distribution taken in May of that year would count as an RMD for that first RMD year.

https://irahelp.com/slottreport/coverdell-esa-accounts-and-first-rmd-year-distributions-todays-slott-report-mailbag/