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How To File Taxes

How to file taxes 7. How to file taxes   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. How to file taxes For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. How to file taxes There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. How to file taxes However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. How to file taxes See Contributions , later. How to file taxes This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. How to file taxes What is the tax benefit of the Coverdell ESA. How to file taxes   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. How to file taxes   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. How to file taxes See Tax-Free Distributions , later. How to file taxes    Table 7-1 summarizes the main features of the Coverdell ESA. How to file taxes Table 7-1. How to file taxes Coverdell ESA at a Glance Do not rely on this table alone. How to file taxes It provides only general highlights. How to file taxes See the text for definitions of terms in bold type and for more complete explanations. How to file taxes Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. How to file taxes Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. How to file taxes Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. How to file taxes Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). How to file taxes Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. How to file taxes What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. How to file taxes When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. How to file taxes To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. How to file taxes The document creating and governing the account must be in writing and must satisfy the following requirements. How to file taxes The trustee or custodian must be a bank or an entity approved by the IRS. How to file taxes The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. How to file taxes The contribution is in cash. How to file taxes The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. How to file taxes The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. How to file taxes Money in the account cannot be invested in life insurance contracts. How to file taxes Money in the account cannot be combined with other property except in a common trust fund or common investment fund. How to file taxes The balance in the account generally must be distributed within 30 days after the earlier of the following events. How to file taxes The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. How to file taxes The beneficiary's death. How to file taxes Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. How to file taxes For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. How to file taxes Designated beneficiary. How to file taxes   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. How to file taxes Contributions to a qualified tuition program (QTP). How to file taxes   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. How to file taxes In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. How to file taxes See chapter 8, Qualified Tuition Program . How to file taxes Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. How to file taxes Eligible postsecondary school. How to file taxes   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. How to file taxes S. How to file taxes Department of Education. How to file taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. How to file taxes The educational institution should be able to tell you if it is an eligible educational institution. How to file taxes   Certain educational institutions located outside the United States also participate in the U. How to file taxes S. How to file taxes Department of Education's Federal Student Aid (FSA) programs. How to file taxes Eligible elementary or secondary school. How to file taxes   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. How to file taxes Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. How to file taxes As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. How to file taxes The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. How to file taxes Tuition and fees. How to file taxes Books, supplies, and equipment. How to file taxes Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. How to file taxes Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). How to file taxes The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. How to file taxes The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. How to file taxes The actual amount charged if the student is residing in housing owned or operated by the school. How to file taxes Half-time student. How to file taxes   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. How to file taxes Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. How to file taxes As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. How to file taxes There are special rules for computer-related expenses. How to file taxes The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. How to file taxes Tuition and fees. How to file taxes Books, supplies, and equipment. How to file taxes Academic tutoring. How to file taxes Special needs services for a special needs beneficiary. How to file taxes The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. How to file taxes Room and board. How to file taxes Uniforms. How to file taxes Transportation. How to file taxes Supplementary items and services (including extended day programs). How to file taxes The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. How to file taxes (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. How to file taxes ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. How to file taxes For individuals filing joint returns, that amount is $220,000. How to file taxes Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. How to file taxes There is no requirement that an organization's income be below a certain level. How to file taxes Contributions must meet all of the following requirements. How to file taxes They must be in cash. How to file taxes They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. How to file taxes They must be made by the due date of the contributor's tax return (not including extensions). How to file taxes Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. How to file taxes Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. How to file taxes Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. How to file taxes When contributions considered made. How to file taxes   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. How to file taxes They must be made by the due date (not including extensions) for filing your return for the preceding year. How to file taxes   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. How to file taxes Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. How to file taxes Limit for each designated beneficiary. How to file taxes   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. How to file taxes This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. How to file taxes Rollovers are discussed under Rollovers and Other Transfers , later. How to file taxes Example. How to file taxes When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. How to file taxes In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. How to file taxes For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. How to file taxes Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. How to file taxes These contributions could be put into any of Maria's Coverdell ESA accounts. How to file taxes Limit for each contributor. How to file taxes   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. How to file taxes This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. How to file taxes Example. How to file taxes The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. How to file taxes If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. How to file taxes Reduced limit. How to file taxes   Your contribution limit may be reduced. How to file taxes If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). How to file taxes If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. How to file taxes Table 7-2. How to file taxes Coverdell ESA Contributions at a Glance Do not rely on this table alone. How to file taxes It provides only general highlights. How to file taxes See the text for more complete explanations. How to file taxes Question Answer Are contributions deductible? No. How to file taxes What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. How to file taxes What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. How to file taxes What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. How to file taxes Can contributions other than cash be made to a Coverdell ESA? No. How to file taxes When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. How to file taxes Modified adjusted gross income (MAGI). How to file taxes   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. How to file taxes MAGI when using Form 1040A. How to file taxes   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. How to file taxes MAGI when using Form 1040. How to file taxes   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. How to file taxes MAGI when using Form 1040NR. How to file taxes   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. How to file taxes MAGI when using Form 1040NR-EZ. How to file taxes   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. How to file taxes   If you have any of these adjustments, you can use Worksheet 7-1. How to file taxes MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. How to file taxes Worksheet 7-1. How to file taxes MAGI for a Coverdell ESA 1. How to file taxes Enter your adjusted gross income  (Form 1040, line 38)   1. How to file taxes   2. How to file taxes Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. How to file taxes       3. How to file taxes Enter your foreign housing deduction (Form 2555, line 50)   3. How to file taxes         4. How to file taxes Enter the amount of income from Puerto Rico you are excluding   4. How to file taxes       5. How to file taxes Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. How to file taxes       6. How to file taxes Add lines 2, 3, 4, and 5   6. How to file taxes   7. How to file taxes Add lines 1 and 6. How to file taxes This is your  modified adjusted gross income   7. How to file taxes   Figuring the limit. How to file taxes    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. How to file taxes The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). How to file taxes The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). How to file taxes Subtract the result from $2,000. How to file taxes This is the amount you can contribute for each beneficiary. How to file taxes You can use Worksheet 7-2. How to file taxes Coverdell ESA Contribution Limit to figure the limit on contributions. How to file taxes    Worksheet 7-2. How to file taxes Coverdell ESA Contribution Limit 1. How to file taxes Maximum contribution   1. How to file taxes $2,000 2. How to file taxes Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. How to file taxes   3. How to file taxes Enter $190,000 if married filing jointly; $95,000 for all other filers   3. How to file taxes   4. How to file taxes Subtract line 3 from line 2. How to file taxes If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. How to file taxes   5. How to file taxes Enter $30,000 if married filing jointly; $15,000 for all other filers   5. How to file taxes     Note. How to file taxes If the amount on line 4 is greater than or equal to the amount on line 5, stop here. How to file taxes You are not allowed to contribute to a Coverdell ESA for 2013. How to file taxes       6. How to file taxes Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. How to file taxes . How to file taxes 7. How to file taxes Multiply line 1 by line 6   7. How to file taxes   8. How to file taxes Subtract line 7 from line 1   8. How to file taxes   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. How to file taxes Example. How to file taxes Paul, who is single, had a MAGI of $96,500 for 2013. How to file taxes Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. How to file taxes Worksheet 7-2. How to file taxes Coverdell ESA Contribution Limit—Illustrated 1. How to file taxes Maximum contribution   1. How to file taxes $2,000 2. How to file taxes Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. How to file taxes 96,500 3. How to file taxes Enter $190,000 if married filing jointly; $95,000 for all other filers   3. How to file taxes 95,000 4. How to file taxes Subtract line 3 from line 2. How to file taxes If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. How to file taxes 1,500 5. How to file taxes Enter $30,000 if married filing jointly; $15,000 for all other filers   5. How to file taxes 15,000   Note. How to file taxes If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. How to file taxes You are not allowed to  contribute to a Coverdell ESA for 2013. How to file taxes       6. How to file taxes Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. How to file taxes . How to file taxes 100 7. How to file taxes Multiply line 1 by line 6   7. How to file taxes 200 8. How to file taxes Subtract line 7 from line 1   8. How to file taxes 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. How to file taxes Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. How to file taxes Excess contributions are the total of the following two amounts. How to file taxes Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). How to file taxes Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. How to file taxes Exceptions. How to file taxes   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). How to file taxes   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. How to file taxes You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. How to file taxes Box 2 of that form will show the amount of earnings on your excess contributions. How to file taxes Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. How to file taxes See Instructions for Recipient on the back of copy B of your Form 1099-Q. How to file taxes Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. How to file taxes For more information, see Taxable Distributions , later. How to file taxes   The excise tax does not apply to any rollover contribution. How to file taxes Note. How to file taxes Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. How to file taxes Example. How to file taxes In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. How to file taxes Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. How to file taxes In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. How to file taxes Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. How to file taxes (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. How to file taxes Figuring and reporting the additional tax. How to file taxes   You figure this excise tax in Part V of Form 5329. How to file taxes Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). How to file taxes Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. How to file taxes The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. How to file taxes Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. How to file taxes This age limitation does not apply if the new beneficiary is a special needs beneficiary. How to file taxes An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. How to file taxes Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. How to file taxes These are not taxable distributions. How to file taxes Members of the beneficiary's family. How to file taxes   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. How to file taxes Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. How to file taxes Brother, sister, stepbrother, or stepsister. How to file taxes Father or mother or ancestor of either. How to file taxes Stepfather or stepmother. How to file taxes Son or daughter of a brother or sister. How to file taxes Brother or sister of father or mother. How to file taxes Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. How to file taxes The spouse of any individual listed above. How to file taxes First cousin. How to file taxes Example. How to file taxes When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. How to file taxes He wanted to give this money to his younger sister, who was still in high school. How to file taxes In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. How to file taxes Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. How to file taxes This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). How to file taxes Military death gratuity. How to file taxes   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). How to file taxes Such payments are made to an eligible survivor upon the death of a member of the armed forces. How to file taxes The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. How to file taxes   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . How to file taxes The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. How to file taxes   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. How to file taxes See Distributions , later. How to file taxes The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. How to file taxes Changing the Designated Beneficiary The designated beneficiary can be changed. How to file taxes See Members of the beneficiary's family , earlier. How to file taxes There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. How to file taxes Example. How to file taxes Assume the same situation for Aaron as in the last example (see Rollovers , earlier). How to file taxes Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. How to file taxes Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. How to file taxes After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. How to file taxes Example. How to file taxes In their divorce settlement, Peg received her ex-husband's Coverdell ESA. How to file taxes In this process, the account was transferred into her name. How to file taxes Peg now treats the funds in this Coverdell ESA as if she were the original owner. How to file taxes Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. How to file taxes Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. How to file taxes See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. How to file taxes Table 7-3. How to file taxes Coverdell ESA Distributions at a Glance Do not rely on this table alone. How to file taxes It provides only general highlights. How to file taxes See the text for definitions of terms in bold type and for more complete explanations. How to file taxes Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. How to file taxes After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. How to file taxes Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. How to file taxes Also, certain transfers to members of the beneficiary's family are permitted. How to file taxes Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. How to file taxes Adjusted qualified education expenses. How to file taxes   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. How to file taxes Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. How to file taxes The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. How to file taxes Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. How to file taxes Do not report tax-free distributions (including qualifying rollovers) on your tax return. How to file taxes Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. How to file taxes Excess distribution. How to file taxes   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. How to file taxes Earnings and basis. How to file taxes   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. How to file taxes The amount of your gross distribution will be shown in box 1. How to file taxes For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. How to file taxes This will be shown in the blank box below boxes 5 and 6. How to file taxes   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. How to file taxes Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. How to file taxes Figure the taxable portion for 2013 as shown in the following steps. How to file taxes Multiply the total amount distributed by a fraction. How to file taxes The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. How to file taxes Subtract the amount figured in (1) from the total amount distributed during 2013. How to file taxes The result is the amount of earnings included in the distribution(s). How to file taxes Multiply the amount of earnings figured in (2) by a fraction. How to file taxes The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. How to file taxes Subtract the amount figured in (3) from the amount figured in (2). How to file taxes The result is the amount the beneficiary must include in income. How to file taxes The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. How to file taxes Example. How to file taxes You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. How to file taxes There were no contributions in 2013. How to file taxes This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. How to file taxes The value (balance) of your account on December 31, 2013, was $950. How to file taxes You had $700 of adjusted qualified education expenses (AQEE) for the year. How to file taxes Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. How to file taxes   1. How to file taxes $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. How to file taxes $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. How to file taxes $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. How to file taxes $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. How to file taxes Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. How to file taxes Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). How to file taxes Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. How to file taxes This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. How to file taxes Example. How to file taxes Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. How to file taxes He paid his college expenses from the following sources. How to file taxes     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. How to file taxes Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. How to file taxes Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. How to file taxes     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. How to file taxes The balance in Derek's account was $1,800 on December 31, 2013. How to file taxes Prior to 2013, $2,100 had been contributed to this account. How to file taxes Contributions for 2013 totaled $400. How to file taxes Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. How to file taxes   1. How to file taxes $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. How to file taxes $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. How to file taxes $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. How to file taxes $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). How to file taxes This is the amount of distributed earnings not used for adjusted qualified higher education expenses. How to file taxes Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. How to file taxes The following two examples illustrate possible allocations. How to file taxes Example 1. How to file taxes In 2013, Beatrice graduated from high school and began her first semester of college. How to file taxes That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. How to file taxes To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. How to file taxes No one claimed Beatrice as a dependent, nor was she eligible for an education credit. How to file taxes She did not receive any tax-free educational assistance in 2013. How to file taxes Beatrice must allocate her total qualified education expenses between the two distributions. How to file taxes Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. How to file taxes The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. How to file taxes Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). How to file taxes She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. How to file taxes Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. How to file taxes (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. How to file taxes ) Example 2. How to file taxes Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. How to file taxes In this case, she allocates her qualified education expenses as follows. How to file taxes Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. How to file taxes Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). How to file taxes   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). How to file taxes See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. How to file taxes   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). How to file taxes The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. How to file taxes However, you do not have to allocate your expenses in the same way. How to file taxes You can use any reasonable method. How to file taxes Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. How to file taxes You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. How to file taxes Your basis is the total amount of contributions to that Coverdell ESA. How to file taxes You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. How to file taxes If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. How to file taxes ) from all such accounts in order to determine your taxable earnings for the year. How to file taxes By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. How to file taxes For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. How to file taxes Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. How to file taxes Exceptions. How to file taxes   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. How to file taxes Made because the designated beneficiary is disabled. How to file taxes A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. How to file taxes A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. How to file taxes Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. How to file taxes Made on account of the attendance of the designated beneficiary at a U. How to file taxes S. How to file taxes military academy (such as the USMA at West Point). How to file taxes This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. How to file taxes S. How to file taxes Code) attributable to such attendance. How to file taxes Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). How to file taxes Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). How to file taxes The distributed earnings must be included in gross income for the year in which the excess contribution was made. How to file taxes Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. How to file taxes Figuring the additional tax. How to file taxes    Use Part II of Form 5329, to figure any additional tax. How to file taxes Report the amount on Form 1040, line 58, or Form 1040NR, line 56. How to file taxes When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. How to file taxes The designated beneficiary reaches age 30. How to file taxes In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. How to file taxes However, this rule does not apply if the beneficiary is a special needs beneficiary. How to file taxes The designated beneficiary dies before reaching age 30. How to file taxes In this case, the remaining assets must generally be distributed within 30 days after the date of death. How to file taxes Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. How to file taxes (“Family member” was defined earlier under Rollovers . How to file taxes ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. How to file taxes This age limitation does not apply if the new beneficiary is a special needs beneficiary. How to file taxes There are no tax consequences as a result of the transfer. How to file taxes How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. How to file taxes You determine these earnings as shown in the following two steps. How to file taxes Multiply the amount distributed by a fraction. How to file taxes The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. How to file taxes Subtract the amount figured in (1) from the total amount distributed during 2013. How to file taxes The result is the amount of earnings included in the distribution. How to file taxes For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. How to file taxes The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. How to file taxes Worksheet 7-3 Instructions. How to file taxes Coverdell ESA—Taxable Distributions and Basis Line G. How to file taxes Enter the total distributions received from all Coverdell ESAs during 2013. How to file taxes Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). How to file taxes Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. How to file taxes Line 2. How to file taxes Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. How to file taxes   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. How to file taxes For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. How to file taxes For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. How to file taxes You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. How to file taxes Line 4. How to file taxes Enter the total distributions received from this Coverdell ESA in 2013. How to file taxes Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). How to file taxes   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. How to file taxes Line 7. How to file taxes Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. How to file taxes A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. How to file taxes   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. How to file taxes An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. How to file taxes Worksheet 7-3. How to file taxes Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. How to file taxes • • • Complete Part I, lines A through H, on only one worksheet. How to file taxes  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. How to file taxes  Complete Part III, the Summary (line 16), on only one worksheet. How to file taxes Part I. How to file taxes Qualified Education Expenses (Complete for total expenses)       A. How to file taxes Enter your total qualified education expenses for 2013   A. How to file taxes   B. How to file taxes Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. How to file taxes         C. How to file taxes Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). How to file taxes Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. How to file taxes         D. How to file taxes Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. How to file taxes         E. How to file taxes Add lines B, C, and D   D. How to file taxes   F. How to file taxes Subtract line E from line A. How to file taxes This is your adjusted qualified education expense for 2013   E. How to file taxes   G. How to file taxes Enter your total distributions from all Coverdell ESAs during 2013. How to file taxes Do not include rollovers  or the return of excess contributions (see instructions)   F. How to file taxes   H. How to file taxes Divide line F by line G. How to file taxes Enter the result as a decimal (rounded to at least 3 places). How to file taxes If the  result is 1. How to file taxes 000 or more, enter 1. How to file taxes 000   G. How to file taxes . How to file taxes Part II. How to file taxes Taxable Distributions and Basis (Complete separately for each account) 1. How to file taxes Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. How to file taxes Do not include rollovers or the return of excess contributions   1. How to file taxes   2. How to file taxes Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. How to file taxes   3. How to file taxes Add lines 1 and 2   3. How to file taxes   4. How to file taxes Enter the total distributions from this Coverdell ESA during 2013. How to file taxes Do not include rollovers  or the return of excess contributions (see instructions)   4. How to file taxes   5. How to file taxes Multiply line 4 by line H. How to file taxes This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. How to file taxes         6. How to file taxes Subtract line 5 from line 4   6. How to file taxes         7. How to file taxes Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. How to file taxes         8. How to file taxes Add lines 4 and 7   8. How to file taxes         9. How to file taxes Divide line 3 by line 8. How to file taxes Enter the result as a decimal (rounded to  at least 3 places). How to file taxes If the result is 1. How to file taxes 000 or more, enter 1. How to file taxes 000   9. How to file taxes . How to file taxes       10. How to file taxes Multiply line 4 by line 9. How to file taxes This is the amount of basis allocated to your  distributions, and is tax free   10. How to file taxes     Note. How to file taxes If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. How to file taxes       11. How to file taxes Subtract line 10 from line 4   11. How to file taxes   12. How to file taxes Divide line 5 by line 4. How to file taxes Enter the result as a decimal (rounded to  at least 3 places). How to file taxes If the result is 1. How to file taxes 000 or more, enter 1. How to file taxes 000   12. How to file taxes . How to file taxes       13. How to file taxes Multiply line 11 by line 12. How to file taxes This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. How to file taxes   14. How to file taxes Subtract line 13 from line 11. How to file taxes This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. How to file taxes   15. How to file taxes Subtract line 10 from line 3. How to file taxes This is your basis in this Coverdell ESA as of December 31, 2013   15. How to file taxes   Part III. How to file taxes Summary (Complete only once)       16. How to file taxes Taxable amount. How to file taxes Add together all amounts on line 14 for all your Coverdell ESAs. How to file taxes Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. How to file taxes   Prev  Up  Next   Home   More Online Publications
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The How To File Taxes

How to file taxes 2. How to file taxes   Roth IRAs Table of Contents What's New for 2013 What's New for 2014 Reminders Introduction What Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA?How Much Can Be Contributed? When Can You Make Contributions? What if You Contribute Too Much? Can You Move Amounts Into a Roth IRA?Conversions Rollover From Employer's Plan Into a Roth IRA Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments Rollover From a Roth IRA Rollover of Exxon Valdez Settlement Income Rollover of Airline Payments Are Distributions Taxable?What Are Qualified Distributions? Additional Tax on Early Distributions Ordering Rules for Distributions How Do You Figure the Taxable Part? Must You Withdraw or Use Assets?Minimum distributions. How to file taxes Recognizing Losses on Investments Distributions After Owner's Death What's New for 2013 Roth IRA contribution limit. How to file taxes  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. How to file taxes If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. How to file taxes However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. How to file taxes For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? in this chapter. How to file taxes Modified AGI limit for Roth IRA contributions increased. How to file taxes  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. How to file taxes Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. How to file taxes You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. How to file taxes Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. How to file taxes You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. How to file taxes Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. How to file taxes You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. How to file taxes See Can You Contribute to a Roth IRA? in this chapter. How to file taxes Net Investment Income Tax. How to file taxes  For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). How to file taxes However, these distributions are taken into account when determining the modified adjusted gross income threshold. How to file taxes Distributions from a nonqualified retirement plan are included in net investment income. How to file taxes See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information. How to file taxes What's New for 2014 Modified AGI limit for Roth IRA contributions increased. How to file taxes  For 2014, your Roth IRA contribution limit is reduced (phased out) in the following situations. How to file taxes Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $181,000. How to file taxes You cannot make a Roth IRA contribution if your modified AGI is $191,000 or more. How to file taxes Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2014 and your modified AGI is at least $114,000. How to file taxes You cannot make a Roth IRA contribution if your modified AGI is $129,000 or more. How to file taxes Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. How to file taxes You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. How to file taxes Reminders Deemed IRAs. How to file taxes  For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. How to file taxes If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. How to file taxes An employee's account can be treated as a traditional IRA or a Roth IRA. How to file taxes For this purpose, a “qualified employer plan” includes: A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), A qualified employee annuity plan (section 403(a) plan), A tax-sheltered annuity plan (section 403(b) plan), and A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state. How to file taxes Designated Roth accounts. How to file taxes  Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. How to file taxes These elective deferrals are included in your income, but qualified distributions from these accounts are not included in your income. How to file taxes Designated Roth accounts are not IRAs and should not be confused with Roth IRAs. How to file taxes Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. How to file taxes A contribution to one does not impact your eligibility to contribute to the other. How to file taxes See Publication 575, for more information on designated Roth accounts. How to file taxes Introduction Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA. How to file taxes Contributions not reported. How to file taxes   You do not report Roth IRA contributions on your return. How to file taxes What Is a Roth IRA? A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined next). How to file taxes It can be either an account or an annuity. How to file taxes Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Opened. How to file taxes To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. How to file taxes A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA. How to file taxes Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. How to file taxes But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. How to file taxes Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live. How to file taxes Traditional IRA. How to file taxes   A traditional IRA is any IRA that is not a Roth IRA or SIMPLE IRA. How to file taxes Traditional IRAs are discussed in chapter 1. How to file taxes When Can a Roth IRA Be Opened? You can open a Roth IRA at any time. How to file taxes However, the time for making contributions for any year is limited. How to file taxes See When Can You Make Contributions , later under Can You Contribute to a Roth IRA. How to file taxes Can You Contribute to a Roth IRA? Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than: $188,000 for married filing jointly or qualifying widow(er), $127,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and $10,000 for married filing separately and you lived with your spouse at any time during the year. How to file taxes You may be able to claim a credit for contributions to your Roth IRA. How to file taxes For more information, see chapter 4. How to file taxes Is there an age limit for contributions?   Contributions can be made to your Roth IRA regardless of your age. How to file taxes Can you contribute to a Roth IRA for your spouse?   You can contribute to a Roth IRA for your spouse provided the contributions satisfy the Kay Bailey Hutchison Spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed, you file jointly, and your modified AGI is less than $188,000. How to file taxes Compensation. How to file taxes   Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. How to file taxes It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments. How to file taxes For more information, see What Is Compensation? under Who Can Open a Traditional IRA? in chapter 1. How to file taxes Modified AGI. How to file taxes   Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return with some adjustments. How to file taxes Use Worksheet 2-1 , later, to determine your modified AGI. How to file taxes    Do not subtract conversion income when figuring your other AGI-based phaseouts and taxable income, such as your deduction for medical and dental expenses. How to file taxes Subtract them from AGI only for the purpose of figuring your modified AGI for Roth IRA purposes. How to file taxes How Much Can Be Contributed? The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs. How to file taxes Worksheet 2-1. How to file taxes Modified Adjusted Gross Income for Roth IRA Purposes Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes. How to file taxes 1. How to file taxes Enter your adjusted gross income from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37 1. How to file taxes   2. How to file taxes Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, line 15b, Form 1040A, line 11b, or Form 1040NR, line 16b) and a rollover from a qualified retirement plan to a Roth IRA (included on Form 1040, line 16b, Form 1040A, line 12b, or Form 1040NR, line 17b) 2. How to file taxes   3. How to file taxes Subtract line 2 from line 1 3. How to file taxes   4. How to file taxes Enter any traditional IRA deduction from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32 4. How to file taxes   5. How to file taxes Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33 5. How to file taxes   6. How to file taxes Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 6. How to file taxes   7. How to file taxes Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34 7. How to file taxes   8. How to file taxes Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 8. How to file taxes   9. How to file taxes Enter any foreign housing deduction from Form 2555, line 50 9. How to file taxes   10. How to file taxes Enter any excludable qualified savings bond interest from Form 8815, line 14 10. How to file taxes   11. How to file taxes Enter any excluded employer-provided adoption benefits from Form 8839, line 28 11. How to file taxes   12. How to file taxes Add the amounts on lines 3 through 11 12. How to file taxes   13. How to file taxes Enter: $188,000 if married filing jointly or qualifying widow(er), $10,000 if married filing separately and you lived with your spouse at any time during the year, or $127,000 for all others 13. How to file taxes   Is the amount on line 12 more than the amount on line 13? If yes, see the note below. How to file taxes  If no, the amount on line 12 is your modified adjusted gross income for Roth IRA purposes. How to file taxes       Note. How to file taxes If the amount on line 12 is more than the amount on line 13 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. How to file taxes (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI. How to file taxes ) Then go to line 3 above in this Worksheet 2-1 to refigure your modified AGI. How to file taxes If you do not have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 12 above. How to file taxes Roth IRAs only. How to file taxes   If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation. How to file taxes   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced . How to file taxes Roth IRAs and traditional IRAs. How to file taxes   If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. How to file taxes Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit. How to file taxes   This means that your contribution limit is the lesser of: $5,500 ($6,500 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs. How to file taxes   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained below under Contribution limit reduced . How to file taxes   Simplified employee pensions (SEPs) are discussed in Publication 560. How to file taxes Savings incentive match plans for employees (SIMPLEs) are discussed in chapter 3. How to file taxes Repayment of reservist distributions. How to file taxes   You can repay qualified reservist distributions even if the repayments would cause your total contributions to the Roth IRA to be more than the general limit on contributions. How to file taxes However, the total repayments cannot be more than the amount of your distribution. How to file taxes Note. How to file taxes If you make repayments of qualified reservist distributions to a Roth IRA, increase your basis in the Roth IRA by the amount of the repayment. How to file taxes For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1. How to file taxes Contribution limit reduced. How to file taxes   If your modified AGI is above a certain amount, your contribution limit is gradually reduced. How to file taxes Use Table 2-1, later, to determine if this reduction applies to you. How to file taxes Table 2-1. How to file taxes Effect of Modified AGI on Roth IRA Contribution This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI). How to file taxes IF you have taxable compensation and your filing status is . How to file taxes . How to file taxes . How to file taxes AND your modified AGI is . How to file taxes . How to file taxes . How to file taxes THEN . How to file taxes . How to file taxes . How to file taxes married filing jointly or  qualifying widow(er) less than $178,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . How to file taxes at least $178,000 but less than $188,000 the amount you can contribute is reduced as explained under Contribution limit reduced . How to file taxes $188,000 or more you cannot contribute to a Roth IRA. How to file taxes married filing separately and you lived with your spouse at any time during the year zero (-0-) you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . How to file taxes more than zero (-0-) but less than $10,000 the amount you can contribute is reduced as explained under Contribution limit reduced . How to file taxes $10,000 or more you cannot contribute to a Roth IRA. How to file taxes single, head of household,  or married filing separately and you did not live with your spouse at any time during the year less than $112,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . How to file taxes at least $112,000 but less than $127,000 the amount you can contribute is reduced as explained under Contribution limit reduced . How to file taxes $127,000 or more you cannot contribute to a Roth IRA. How to file taxes Figuring the reduction. How to file taxes   If the amount you can contribute must be reduced, use Worksheet 2-2, later, to figure your reduced contribution limit. How to file taxes Worksheet 2-2. How to file taxes Determining Your Reduced Roth IRA Contribution Limit Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. How to file taxes If it is, use this worksheet to determine how much it is reduced. How to file taxes 1. How to file taxes Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. How to file taxes   2. How to file taxes Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. How to file taxes   3. How to file taxes Subtract line 2 from line 1 3. How to file taxes   4. How to file taxes Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. How to file taxes   5. How to file taxes Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). How to file taxes If the result is 1. How to file taxes 000 or more, enter 1. How to file taxes 000 5. How to file taxes   6. How to file taxes Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. How to file taxes   7. How to file taxes Multiply line 5 by line 6 7. How to file taxes   8. How to file taxes Subtract line 7 from line 6. How to file taxes Round the result up to the nearest $10. How to file taxes If the result is less than $200, enter $200 8. How to file taxes   9. How to file taxes Enter contributions for the year to other IRAs 9. How to file taxes   10. How to file taxes Subtract line 9 from line 6 10. How to file taxes   11. How to file taxes Enter the lesser of line 8 or line 10. How to file taxes This is your reduced Roth IRA contribution limit 11. How to file taxes      Round your reduced contribution limit up to the nearest $10. How to file taxes If your reduced contribution limit is more than $0, but less than $200, increase the limit to $200. How to file taxes Example. How to file taxes You are a 45-year-old, single individual with taxable compensation of $113,000. How to file taxes You want to make the maximum allowable contribution to your Roth IRA for 2013. How to file taxes Your modified AGI for 2013 is $113,000. How to file taxes You have not contributed to any traditional IRA, so the maximum contribution limit before the modified AGI reduction is $5,500. How to file taxes You figure your reduced Roth IRA contribution of $5,140 as shown on Worksheet 2-2. How to file taxes Example—Illustrated, later. How to file taxes   Worksheet 2-2. How to file taxes Example—Illustrated Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. How to file taxes If it is, use this worksheet to determine how much it is reduced. How to file taxes 1. How to file taxes Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. How to file taxes 113,000 2. How to file taxes Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. How to file taxes 112,000 3. How to file taxes Subtract line 2 from line 1 3. How to file taxes 1,000 4. How to file taxes Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. How to file taxes 15,000 5. How to file taxes Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). How to file taxes If the result is 1. How to file taxes 000 or more, enter 1. How to file taxes 000 5. How to file taxes . How to file taxes 067 6. How to file taxes Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. How to file taxes 5,500 7. How to file taxes Multiply line 5 by line 6 7. How to file taxes 369 8. How to file taxes Subtract line 7 from line 6. How to file taxes Round the result up to the nearest $10. How to file taxes If the result is less than $200, enter $200 8. How to file taxes 5,140 9. How to file taxes Enter contributions for the year to other IRAs 9. How to file taxes 0 10. How to file taxes Subtract line 9 from line 6 10. How to file taxes 5,500 11. How to file taxes Enter the lesser of line 8 or line 10. How to file taxes This is your reduced Roth IRA contribution limit 11. How to file taxes 5,140 When Can You Make Contributions? You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). How to file taxes You can make contributions for 2013 by the due date (not including extensions) for filing your 2013 tax return. How to file taxes This means that most people can make contributions for 2013 by April 15, 2014. How to file taxes What if You Contribute Too Much? A 6% excise tax applies to any excess contribution to a Roth IRA. How to file taxes Excess contributions. How to file taxes   These are the contributions to your Roth IRAs for a year that equal the total of: Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can Be Contributed? ), plus Any excess contributions for the preceding year, reduced by the total of: Any distributions out of your Roth IRAs for the year, plus Your contribution limit for the year minus your contributions to all your IRAs for the year. How to file taxes Withdrawal of excess contributions. How to file taxes   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. How to file taxes This treatment only applies if any earnings on the contributions are also withdrawn. How to file taxes The earnings are considered earned and received in the year the excess contribution was made. How to file taxes   If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. How to file taxes If you do, file an amended return with “Filed pursuant to section 301. How to file taxes 9100-2” written at the top. How to file taxes Report any related earnings on the amended return and include an explanation of the withdrawal. How to file taxes Make any other necessary changes on the amended return. How to file taxes Applying excess contributions. How to file taxes    If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. How to file taxes Can You Move Amounts Into a Roth IRA? You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. How to file taxes You may be able to roll over amounts from a qualified retirement plan to a Roth IRA. How to file taxes You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. How to file taxes You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA. How to file taxes Conversions You can convert a traditional IRA to a Roth IRA. How to file taxes The conversion is treated as a rollover, regardless of the conversion method used. How to file taxes Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. How to file taxes However, the 1-year waiting period does not apply. How to file taxes Conversion methods. How to file taxes   You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways. How to file taxes Rollover. How to file taxes You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution. How to file taxes Trustee-to-trustee transfer. How to file taxes You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA. How to file taxes Same trustee transfer. How to file taxes If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA. How to file taxes Same trustee. How to file taxes   Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract. How to file taxes Income. How to file taxes   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. How to file taxes These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. How to file taxes If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. How to file taxes See Publication 505, Tax Withholding and Estimated Tax. How to file taxes More information. How to file taxes   For more information on conversions, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1. How to file taxes Rollover From Employer's Plan Into a Roth IRA You can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan); Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). How to file taxes Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. How to file taxes See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. How to file taxes Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan. How to file taxes Rollover methods. How to file taxes   You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways. How to file taxes Rollover. How to file taxes You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. How to file taxes Since the distribution is paid directly to you, the payer generally must withhold 20% of it. How to file taxes Direct rollover option. How to file taxes Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. How to file taxes Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA. How to file taxes Rollover by nonspouse beneficiary. How to file taxes   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you can roll over all or part of an eligible rollover distribution from one of the types of plans listed above into a Roth IRA. How to file taxes You must make the rollover by a direct trustee-to-trustee transfer into an inherited Roth IRA. How to file taxes   You will determine your required minimum distributions in years after you make the rollover based on whether the employee died before his or her required beginning date for taking distributions from the plan. How to file taxes For more information, see Distributions after the employee’s death under Tax on Excess Accumulation in Publication 575. How to file taxes Income. How to file taxes   You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. How to file taxes You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid. How to file taxes These amounts are normally included in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA. How to file taxes If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. How to file taxes See Publication 505, Tax Withholding and Estimated Tax. How to file taxes For more information on eligible rollover distributions from qualified retirement plans and withholding, see Rollover From Employer's Plan Into an IRA in chapter 1. How to file taxes Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. How to file taxes The contribution is treated as a qualified rollover contribution. How to file taxes The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. How to file taxes Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers. How to file taxes The rollover must be completed before the end of the 1-year period beginning on the date you received the payment. How to file taxes The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. How to file taxes Rollover From a Roth IRA You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. How to file taxes Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. How to file taxes However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers. How to file taxes A rollover from a Roth IRA to an employer retirement plan is not allowed. How to file taxes A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA. How to file taxes If you roll over an amount from one Roth IRA to another Roth IRA, the 5-year period used to determine qualified distributions does not change. How to file taxes The 5-year period begins with the first taxable year for which the contribution was made to the initial Roth IRA. How to file taxes See What are Qualified Distributions , later. How to file taxes Rollover of Exxon Valdez Settlement Income If you are a qualified taxpayer (defined in chapter 1, earlier) and you received qualified settlement income (defined in chapter 1, earlier), you can contribute all or part of the amount received to an eligible retirement plan which includes a Roth IRA. How to file taxes The rules for contributing qualified settlement income to a Roth IRA are the same as the rules for contributing qualified settlement income to a traditional IRA with the following exception. How to file taxes Qualified settlement income that is contributed to a Roth IRA, or to a designated Roth account, will be: Included in your taxable income for the year the qualified settlement income was received, and Treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. How to file taxes For more information, see Rollover of Exxon Valdez Settlement Income in chapter 1. How to file taxes Rollover of Airline Payments If you are a qualified airline employee (defined next), you may contribute any portion of an airline payment (defined below) you receive to a Roth IRA. How to file taxes The contribution must be made within 180 days from the date you received the payment. How to file taxes The contribution will be treated as a qualified rollover contribution. How to file taxes The rollover contribution is included in income to the extent it would be included in income if it were not part of the rollover contribution. How to file taxes Also, any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can contribute to your Roth IRA. How to file taxes Qualified airline employee. How to file taxes    A current or former employee of a commercial airline carrier who was a participant in a qualified defined benefit plan maintained by the carrier which was terminated or became subject to restrictions under Section 402(b) of the Pension Protection Act of 2006. How to file taxes These provisions also apply to surviving spouses of qualified airline employees. How to file taxes Airline payment. How to file taxes    An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. How to file taxes The payment also must be made both: Under the approval of an order of federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and In respect of the qualified airline employee’s interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount. How to file taxes Any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can roll over to your traditional IRA. How to file taxes Also, an airline payment shall not include any amount payable on the basis of the airline carrier’s future earnings or profits. How to file taxes Are Distributions Taxable? You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). How to file taxes You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. How to file taxes You may have to include part of other distributions in your income. How to file taxes See Ordering Rules for Distributions , later. How to file taxes Basis of distributed property. How to file taxes   The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution. How to file taxes Withdrawals of contributions by due date. How to file taxes   If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. How to file taxes If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. How to file taxes The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions. How to file taxes What Are Qualified Distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements. How to file taxes It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and The payment or distribution is: Made on or after the date you reach age 59½, Made because you are disabled (defined earlier), Made to a beneficiary or to your estate after your death, or One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit). How to file taxes Additional Tax on Early Distributions If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs. How to file taxes Distributions of conversion and certain rollover contributions within 5-year period. How to file taxes   If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. How to file taxes You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). How to file taxes A separate 5-year period applies to each conversion and rollover. How to file taxes See Ordering Rules for Distributions , later, to determine the recapture amount, if any. How to file taxes   The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. How to file taxes See What Are Qualified Distributions , earlier. How to file taxes   For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2013, and makes a regular contribution for 2012 on the same date, the 5-year period for the conversion begins January 1, 2013, while the 5-year period for the regular contribution begins on January 1, 2012. How to file taxes   Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover. How to file taxes   You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. How to file taxes You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions. How to file taxes Other early distributions. How to file taxes   Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions. How to file taxes Exceptions. How to file taxes   You may not have to pay the 10% additional tax in the following situations. How to file taxes You have reached age 59½. How to file taxes You are totally and permanently disabled. How to file taxes You are the beneficiary of a deceased IRA owner. How to file taxes You use the distribution to buy, build, or rebuild a first home. How to file taxes The distributions are part of a series of substantially equal payments. How to file taxes You have unreimbursed medical expenses that are more than 10% (or 7. How to file taxes 5% if you or your spouse was born before January 2, 1949) of your adjusted gross income (defined earlier) for the year. How to file taxes You are paying medical insurance premiums during a period of unemployment. How to file taxes The distributions are not more than your qualified higher education expenses. How to file taxes The distribution is due to an IRS levy of the qualified plan. How to file taxes The distribution is a qualified reservist distribution. How to file taxes Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . How to file taxes Please click here for the text description of the image. How to file taxes Is Roth Distributions a Qualified Distribution? Ordering Rules for Distributions If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. How to file taxes There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. How to file taxes For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed earlier under What if You Contribute Too Much ). How to file taxes Order the distributions as follows. How to file taxes Regular contributions. How to file taxes Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). How to file taxes See Aggregation (grouping and adding) rules, later. How to file taxes Take these conversion and rollover contributions into account as follows: Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the Nontaxable portion. How to file taxes Earnings on contributions. How to file taxes Disregard rollover contributions from other Roth IRAs for this purpose. How to file taxes Aggregation (grouping and adding) rules. How to file taxes   Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows. How to file taxes Add all distributions from all your Roth IRAs during the year together. How to file taxes Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. How to file taxes Add this total to the total undistributed regular contributions made in prior years. How to file taxes Add all conversion and rollover contributions made during the year together. How to file taxes For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2013 and the conversion or rollover contribution is made in 2014, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2014. How to file taxes Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA. How to file taxes   Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. How to file taxes Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose. How to file taxes Example. How to file taxes On October 15, 2009, Justin converted all $80,000 in his traditional IRA to his Roth IRA. How to file taxes His Forms 8606 from prior years show that $20,000 of the amount converted is his basis. How to file taxes Justin included $60,000 ($80,000 − $20,000) in his gross income. How to file taxes On February 23, 2013, Justin made a regular contribution of $5,000 to a Roth IRA. How to file taxes On November 8, 2013, at age 60, Justin took a $7,000 distribution from his Roth IRA. How to file taxes The first $5,000 of the distribution is a return of Justin's regular contribution and is not includible in his income. How to file taxes The next $2,000 of the distribution is not includible in income because it was included previously. How to file taxes Figuring your recapture amount. How to file taxes   If you had an early distribution from your Roth IRAs in 2013, you must allocate the early distribution by using the Recapture Amount—Allocation Chart, later. How to file taxes Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19   Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. How to file taxes   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). How to file taxes The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. How to file taxes Note. How to file taxes Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. How to file taxes See the Example , earlier. How to file taxes Tax Year Your Form 2013 Form 8606, line 20   Form 8606, line 22   1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18   Form 8606, line 17   2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. How to file taxes  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. How to file taxes Amount to include on Form 5329, line 1. How to file taxes   Include on line 1 of your 2013 Form 5329 the following four amounts from the Recapture Amount—Allocation Chart that you filled out. How to file taxes The amount you allocated to line 20 of your 2013 Form 8606. How to file taxes The amount(s) allocated to your 2009 through 2013 Forms 8606, line 18, and your 2010 Form 8606, line 23. How to file taxes The amount(s) allocated to your 2009, 2011, 2012, and 2013 Forms 1040, line 16b; Forms 1040A, line 12b; and Forms 1040NR, line 17b. How to file taxes The amount from your 2013 Form 8606, line 25. How to file taxes   Also, include any amount you allocated to line 20 of your 2013 Form 8606 on your 2013 Form 5329, line 2, and enter exception number 09. How to file taxes Example. How to file taxes Ishmael, age 32, opened a Roth IRA in 2000. How to file taxes He made the maximum contributions to it every year. How to file taxes In addition, he made the following transactions into his Roth IRA. How to file taxes In 2005, he converted $10,000 from his traditional IRA into his Roth IRA. How to file taxes He filled out a 2005 Form 8606 and attached it with his 2005 Form 1040. How to file taxes He entered $0 on line 17 of Form 8606 because he took a deduction for all the contributions to the traditional IRA, therefore he has no basis. How to file taxes He entered $10,000 on line 18 of Form 8606. How to file taxes In 2011, he rolled over the entire balance of his qualified retirement plan, $20,000, into a Roth IRA when he changed jobs. How to file taxes He used a 2011 Form 1040 to file his taxes. How to file taxes He entered $20,000 on line 16a of Form 1040 because that was the amount reported in box 1 of his 2011 Form 1099-R. How to file taxes Box 5 of his 2011 Form 1099-R reported $0 since he did not make any after-tax contributions to the qualified retirement plan. How to file taxes He entered $20,000 on line 16b of Form 1040 since that is the taxable amount that was rolled over in 2011. How to file taxes The total balance in his Roth IRA as of January 1, 2013 was $105,000 ($50,000 in contributions from 2000 through 2012 + $10,000 from the 2005 conversion + $20,000 from the 2011 rollover + $25,000 from earnings). How to file taxes He has not taken any early distribution from his Roth IRA before 2013. How to file taxes In 2013, he made the maximum contribution of $5,500 to his Roth IRA. How to file taxes In August of 2013, he took a $85,500 early distribution from his Roth IRA to use as a down payment on the purchase of his first home. How to file taxes See his filled out Illustrated Recapture Amount—Allocation Chart, later, to see how he allocated the amounts from the above transactions. How to file taxes Based on his allocation, he would enter $20,000 on his 2013 Form 5329, line 1 (see Amount to include on Form 5329, line 1 , above). How to file taxes He should also report $10,000 on his 2013 Form 5329, line 2, and enter exception 09 since that amount is not subject to the 10% additional tax on early distributions. How to file taxes Illustrated Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19 $85,500 Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. How to file taxes   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). How to file taxes The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. How to file taxes Note. How to file taxes Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. How to file taxes See the Example , earlier. How to file taxes Tax Year Your Form 2013 Form 8606, line 20 $10,000 Form 8606, line 22 $55,500 1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18 $10,000 Form 8606, line 17 $-0- 2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b* $10,000 Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. How to file taxes  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. How to file taxes How Do You Figure the Taxable Part? To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III. How to file taxes Must You Withdraw or Use Assets? You are not required to take distributions from your Roth IRA at any age. How to file taxes The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. How to file taxes However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death . How to file taxes Minimum distributions. How to file taxes   You cannot use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. How to file taxes Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs. How to file taxes See Distributions to beneficiaries , later. How to file taxes Recognizing Losses on Investments If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis. How to file taxes Your basis is the total amount of contributions in your Roth IRAs. How to file taxes You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). How to file taxes Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax. How to file taxes Distributions After Owner's Death If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. How to file taxes See When Can You Withdraw or Use Assets? in chapter 1. How to file taxes Distributions to beneficiaries. How to file taxes   Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. How to file taxes (See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1. How to file taxes )   If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. How to file taxes Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent. How to file taxes   If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own. How to file taxes Combining with other Roth IRAs. How to file taxes   A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either: Inherited the other Roth IRA from the same decedent, or Was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA. How to file taxes Distributions that are not qualified distributions. How to file taxes   If a distribution to a beneficiary is not a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive. How to file taxes   If the owner of a Roth IRA dies before the end of: The 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, or The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA, each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. How to file taxes See Ordering Rules for Distributions , earlier in this chapter under Are Distributions Taxable. How to file taxes Example. How to file taxes When Ms. How to file taxes Hibbard died in 2013, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2009, and earnings of $2,000. How to file taxes No distributions had been made from her IRA. How to file taxes She had no basis in the conversion contribution in 2009. How to file taxes When she established this Roth IRA (her first) in 2009, she named each of her four children as equal beneficiaries. How to file taxes Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. How to file taxes An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings. How to file taxes In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2013. How to file taxes The 10% additional tax on early distributions does not apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner. How to file taxes If distributions from an inherited Roth IRA are less than the required minimum distribution for the year, discussed in chapter 1 under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. How to file taxes For the tax on excess accumulations (insufficient distributions), see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? in chapter 1. How to file taxes If this applies to you, substitute “Roth IRA” for “traditional IRA” in that discussion. How to file taxes Prev  Up  Next   Home   More Online Publications