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Question for the Money Doctors

Question submitted on Feb 19, 2013.


Hi. My daughter had a Coverdell IRA, which we planned to indirectly rollover into the Indiana 529 Plan. The balance of $4500 included $4200 in contributions and $300 in dividends earned. I was told we had 60 days to complete the rollover to avoid tax consequences.
What I''m wondering is, if we do the rollover, does the $4500 count toward a tax credit on our state taxes? If not, would we be allowed to just pay the taxes and penalty on the $300 in dividend earnings and open a new 529 account in order to get the credit? Thank you.


Yes, Indiana follows the Federal tax free treatment of rollovers so you could roll the Coverdell into a new Indiana 529. Howvever, effective January 1, 2010, rollover contributions to an Indiana 529 do not count towards the state tax credit. The credit in Indiana is 20% of the contribution up to $5,000 per year in contributions for a maximum $1,000 annual credit.

As you suggest, you could close the Coverdell IRA and pay the taxes and penalty on the $300 in earnings. You could open a new Indiana 529 and make the contribution in order to obtain the state tax credit on your Indiana return.

Keep in mind you will have to recapture the Indiana tax credit on subsequent Indiana tax returns if the account is terminated within 12 months from opening, or any nonqualified withdrawals are made to the extent of the Indiana tax credits previously claimed. If you use the funds as intended for the beneficiary's education expenses, then the recapture of the Indiana tax credit won't be a concern.

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