Susan D. Diehl
It was Interesting — and surprising to many of us — that the IRS recently issued a technical advice memorandum on rollovers between Coverdell education savings accounts (ESAs).
According to an IRS program manager, technical advice memorandum (PMTA 2016-10), which the IRS released on Aug. 31, a taxpayer can only make one rollover from one Coverdell ESA to another ESA in a one-year period, regardless of the number of accounts they own. (Interesting note — The PMTA was dated 12/14/2015, but actually released in September of 2016!)
The PMTA was in response to a guidance request regarding the limitation on the number of rollovers permitted under tax code Section 530(d)(5) for Coverdell ESAs in light of the 2014 U.S. Tax Court decision in Bobrow v. Commissioner. In this case, the issue was rolling over more than one distribution per year between IRAs (which, by the way, are covered under Internal Revenue Code Section 408). And we all know that the Bobrow case prompted the IRS to tell us that their new IRA regulations (still not released) were changing and that effective in 2015 taxpayers were only permitted to do one rollover per 12-month period, and the rule included traditional IRAs, Roth IRAs, SEPs and SIMPLE-IRAs.
The IRS in 2015 received a request from the Publications and Forms Department of the IRS, who were in the process of updating Publication 970, “Tax Benefits for Education,” and requested the answer to the limitation of rolling over between ESAs.
In the PMTA the IRS states: “You can make only one rollover from a Coverdell ESA to another Coverdell ESA in any 12-month period regardless of the number of Coverdell ESAs you own. However, you can make unlimited transfers from one Coverdell ESA trustee directly to another Coverdell ESA trustee because such transfers are not considered to be distributions or rollovers.”
There is no published guidance interpreting the Code Section 530(d)(5) limitation on ESA rollovers. However, Publication 970 states that only one rollover per Coverdell ESA is allowed during a 12-month period.
In light of the similarity of the language of Code Sections 408(d)(3)(B) and 530(d)(5), the IRS interpretation regarding ESA rollovers is that only one rollover per individual per year is permitted.
The IRS went on to suggest that in the Publication 970, using the following language in both the “What's New” section and in the “Caution” box under “Rollovers and Other Transfers” section of Chapter 7:
“You can make only one rollover from a Coverdell ESA to another Coverdell ESA in any 12-month period regardless of the number of Coverdell ESAs you own. However, you can make unlimited transfers from one Coverdell ESA trustee directly to another Coverdell ESA trustee because such transfers are not considered to be distributions or rollovers. The once in any 12-period limitation rule does not apply to the rollover of a military death gratuity or payment from Service members' Group Life Insurance (SGLI).”
Susan D. Diehl, CPC, QPA, ERPA, is President of PenServ Plan Services, Inc. and Chair of the NTSA Communications Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.