Coverdell to Sec 529 Rollover
A contribution to a 529 plan is a qualified education expense of the Coverdell ESA if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. 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 (IRS Pub 970).
Thus, Coverdell ESA funds can be distributed and deposited (rolled over) into a 529 plan by following these instructions:
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Withdrawal - Withdraw the funds from the Coverdell ESA or do a trustee-to-trustee transfer.
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529 Plan Deposit - Deposit them into an existing or newly established 529 plan.
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Time Frame - The transfer (rollover) must be completed in 60 days.
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Same Beneficiary - Distributions used to fund a 529 plan are considered a qualified expense as long as both accounts have the same beneficiary.
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Contributions & Earnings Statement – Provide the 529 plan with a statement from the financial institution that acted as trustee or custodian showing contributions and earnings (or losses) in the Coverdell ESA account. Failure to provide this information to the 529 plan is critical. Without the breakdown between basis and gain/(loss), the 529 plan will treat the transfer as consisting entirely of earnings subject to income tax and a 10% additional tax if later taken as a non-qualifying distribution from the 529 plan.
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After the Transfer – The funds will follow the rules for 529 plans (Chapter 5.05) which are more liberal than a Coverdell and summarized here:
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Rollover to a Roth IRA: The beneficiary of the 529 plan would be permitted to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA, provided the following requirements are met.
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The 529 account must have been open for more than 15 years.
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These rollovers are also subject to Roth IRA annual contribution limits.
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The aggregate amount contributed to the 529 account in the previous five years cannot be rolled over.
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Student Loan Payment - The beneficiary of the 529 plan would be permitted to distribute up to $10,000 (lifetime) to pay principal and interest of qualified higher education loans, including those for siblings.
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Elementary and High School Tuition - Up to $10,000 annually per student can be used for tuition expenses at public, private, and religious elementary and high schools.
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Apprenticeship Programs - Qualified higher education expenses associated with registered apprenticeship programs certified by the Secretary of Labor are eligible expenses.
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Room and Board - If the beneficiary attends a qualified school at least half-time, funds can be used for room and board expenses.
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Special Needs Expenses - Expenses necessary for a special needs student to enroll or attend an eligible educational institution are qualified.
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Computers and Related Equipment -Funds can be used for computers, peripheral equipment, computer software, internet access, and related services primarily used by the beneficiary while enrolled at an eligible educational institution.
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Change the Designated Beneficiary - Section 529 plans allow the account owner to change the designated beneficiary to another member of the family without incurring penalties. This flexibility is beneficial if the original beneficiary decides not to pursue higher education or if there are leftover funds after their education expenses are covered. The new beneficiary must be a family member, which includes siblings, parents, children, and other relatives as defined by the plan's rules. This change is treated as a transfer from the original beneficiary to the new beneficiary, even though it is directed by the account owner.
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Mandatory Distributions – There is no mandatory distribution from a 529 plan, unlike the Coverdell rules that mandate distributions prior to age 30 except for special needs students.
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