Closing Educational IRA

Forum|Forum|2 years ago
July 20, 2023
2 replies
6 views

My husband opened an educational IRA for his granddaughter 20 years ago. It has about $4000. She is not going to college and has cut off all contact with him over 5 years ago. He would like to close the account and do something else with the money. If the account is closed, is it subject to ordinary income tax plus 10% penalty? Does he simply need to contact the bank where the account is held, and then receive a tax form at the end of the year?

Not A Product Question

Critter-3

Level 15

Contact the IRA custodian to make a closing distribution.

xmasbaby0

Level 15

You have not told us how old you are -- if you are younger than 59 1/2 there is a 10% early withdrawal penalty as well as ordinary income tax on the distribution from the retirement account. They will send you a 1099R in late January or early February, which must be entered on your tax return.

Go to Federal> Wages and Income>Retirement Plans and Social Security>IRA 401 k) Pension Plan Withdrawals to enter your 1099R.

**Disclaimer: Every effort has been made to offer the most correct information possible. The poster disclaims any legal responsibility for the accuracy of the information that is contained in this post.**

Lizyx211Author

Level 2

My husband is 72, I am 57.

Hal_Al

Level 15

An "education IRA" is a tax-advantaged investment account for higher education, now more formally known as a Coverdell Education Savings Account (ESA).

Despite the "IRA" name, an ESA is not an IRA when it comes to distributions (and other rules). That is, being over 59-1/2 does not get you out of the 10% penalty. The penalty applies, since it will be a non-qualified distribution (it was not used for educational expenses of the beneficiary).

Another option is to change the beneficiary to another grandchild. For full rules, see

https://fairmark.com/kids-and-college/coverdell-accounts/changing-the-beneficiary/

In particular, note that the beneficiary's siblings and first cousins (your other grandchildren) are qualified persons for a beneficiary change. They must be under 30 years of age, for an ESA beneficiary change.