Can You Rollover Funds from a 529 Plan to a Coverdell ESA?
You cannot rollover funds from a 529 Plan to a Coverdell Education Savings Account (ESA). However, Coverdell ESAs allow tax-free rollovers to other Coverdell ESAs and to 529 plans with the same beneficiary or a beneficiary who is a family member of the current beneficiary.
Families may use a 529 plan, a Coverdell ESA, or a combination of both to save for college or K-12 expenses. Coverdell ESAs have a wider range of qualified K-12 expenses than 529 plans, but they also have income limits and low annual contribution limits.
What is a Coverdell ESA?
A Coverdell ESA is a tax-advantaged account designed to help families save for college and K-12 education. Similar to a 529 plan, investment earnings in a Coverdell ESA grow tax-deferred and distributions are tax-free when the funds are used to pay for qualified higher education expenses (QHEE) and qualified elementary and secondary expenses (QESEE).
What are the differences between a Coverdell ESA and a 529 plan?
Some of the biggest differences between a Coverdell ESA and a 529 plan are:
- Income limits. Individuals with an adjusted gross income (AGI) greater than $110,000 ($220,000 if married) are not eligible to contribute to a Coverdell ESA. Contribution limits are reduced for individuals with an AGI between $95,000 and $110,000 ($190,000 and $220,000 if married). 529 plans do not have income limits.
- Contribution limits. Total Coverdell ESA contributions for a beneficiary in a given year cannot exceed $2,000. A beneficiary may have more than one Coverdell ESA account, but the total contributions for all of the accounts cannot be more than $2,000 per year. Contributions to a Coverdell ESA must stop when the beneficiary turns 18, unless the beneficiary is a special needs beneficiary. 529 plans have no annual contribution limits and very high aggregate limits.
- Qualified expenses. Coverdell ESAs and 529 plans allow tax-free distributions to pay for qualified college expenses, but 529 plans limit qualified K-12 expenses to $10,000 in tuition per year.
- Age limit. A Coverdell ESA beneficiary must be under age 18. Funds in a Coverdell ESA must be distributed by 30 days after the beneficiary turns age 30. Age limits are waived if the beneficiary has special needs. 529 plans do not have age limits.
529 plan to Coverdell ESA rollover (taxable)
Some expenses, such as books and supplies for K-12 education, are QESEE but are not considered qualified 529 plan expenses. Parents may not take a tax-free 529 plan distribution to pay for K-12 expenses other than tuition, and they may not roll 529 plan funds into a Coverdell ESA.
If a 529 plan account owner transfers funds from a 529 plan to a Coverdell ESA it will be considered a non-qualified distribution. The earnings portion of a non-qualified distribution is subject to income tax and a 10% penalty, and any state income tax benefits claimed may be subject to recapture.
Coverdell ESA to Coverdell ESA rollover (tax-free)
A Coverdell ESA owner may want to transfer the funds to a sibling when the beneficiary graduates or leaves college or to avoid a taxable distribution when the beneficiary is about to turn age 30 .
Funds held in a Coverdell ESA may be rolled over to another Coverdell ESA with the same beneficiary or when the new beneficiary is a family member of the current beneficiary who is under age 30 or has special needs. Coverdell ESA rollovers are tax-free when the funds are rolled over to another Coverdell ESA within 60 days of the distribution. Like 529 plan rollovers, Coverdell ESA owners may only make one rollover in a 12-month period.
Coverdell ESAs allow unlimited trustee-to-trustee transfers, which allow account owners to directly transfer funds from one Coverdell ESA to another. Coverdell ESA owners may also change the beneficiary of the Coverdell ESA to a qualifying member of the beneficiary’s family without tax consequences. The new beneficiary must be under age 30 unless they have special needs.
Coverdell ESA to 529 plan rollovers (tax-free)
Coverdell ESA owners may roll funds into a 529 plan for the same beneficiary without tax consequences. The distribution is tax-free when the 529 plan is funded within 60 days. A Coverdell ESA to 529 plan rollover may also be done as a trustee-trustee transfer.
There are no state income tax benefits available for Coverdell ESA contributions, but in some states rollover contributions from a Coverdell ESA to a 529 plan are eligible for income tax benefits.
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