► Coverdell Education Savings Accounts
Coverdell ESAs were
created to help parents and students save for education expenses. The
total contribution cannot be more than $2,000 in any single year. A
beneficiary is someone who is under age 18, or has special needs.
Contributions to a Coverdell ESA are not tax-deductible, but amounts
deposited grow tax free until distributed. The beneficiary will not owe
tax on the distributions if they are less than the qualified education
expenses at an eligible institution. This benefit applies to qualified
higher education expenses, as well as to qualified elementary and
secondary education expenses.
If the distribution exceeds qualified education expenses, a portion will
be taxable to the beneficiary and will usually be subject to an
additional 10% tax. Exceptions to the 10% penalty include death or
disability of the beneficiary, or if the beneficiary receives a
qualified scholarship.
If there is a balance in the Coverdell ESA when the beneficiary reaches
age 30, it must be distributed within 30 days. A beneficiary may avoid
paying tax by rolling over the full remaining balance to a Coverdell ESA
for another family member. Any remaining balance not used or rolled-over
may be reported as unclaimed property at some number of years determined
by each individual state, if contact with the owner has been lost.
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► Lost or Unclaimed
IRA Individual Retirement Accounts
There is no limit to the
number of Individual Retirement Accounts that an individual can have. IRAs
may contain a variety of investments including bank accounts, certificates
of deposit, stocks, bonds, precious metals, commodities, and even real
estate; but half of all IRAs are administered by and invested in various
mutual funds. About one-third are held in brokerage accounts, while bank
deposits and life insurance annuities make up the remainder.
Earnings on Traditional IRAs grow on a tax-deferred basis until
withdrawals begin. About 15% of IRAs - totaling some $450 million - are
held by those aged 70 and above. The average account value is around
$100,000.
Due to the long term nature of this type of investment, each year large
numbers of owners and heirs - who may not be aware of a deceased family
member's IRA or rollover 401(k) - fail to claim accounts to which
they're entitled.
While unclaimed 401(k) retirement plan assets are subject to federal
guidelines mandated by ERISA, the Employee Retirement Income Security
Act of 1974, most dormant and forgotten IRAs at banks, brokerages and
insurance companies are not.
They come under the purview of state
unclaimed property statutes, whereby a trustee takes custody of the
funds based on a legal doctrine known as ‘escheat.’ It’s important to
note, however, that in some cases 401(k) plan assets can lose their ERISA
pre-emption and become subject to state escheat.
The rules for determining how a dormant and unclaimed IRA is treated
depend on the type of account and the owner’s state of residence.
Generally speaking, a Traditional IRA is considered unclaimed if a
withdrawal is not made by age 70˝; the age at which non-withdrawal
triggers a 50% tax penalty under the IRS code. Both Traditional IRAs and
Roth IRAs may be considered abandoned if one or more distribution checks
remain uncashed, which can occur when the owner reaches age 59˝ or
before, if early withdrawal is taken.
