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COLLEGE SAVINGS 101
No. 2 - Will you be able to transfer from a 529 to a Coverdell account if the 529exclusion expires in 2010?
http://www.savingforcollege.com/articles/no-2---will-you-be-able-to-transfer-from-a-529-to-a-coverdell-account-if-the-529exclusion-expires-in-2010
Posted: 2002-10-01
If someone transfers their child's Coverdell education savings account to a 529 plan, and in 2010 the tax exemption for 529 plans expires, can the money be transferred from the 529 plan back to the Coverdell account? - CP
Answer: That sounds like a sensible solution to the problem of the 2010 ""sunset,"" CP, but unfortunately the transfer rule is a one-way street. You can put your Coverdell money into a 529 plan without triggering tax or penalty, but it doesn't work the other way around.
It is for this reason that you should not be too quick to transfer funds from a Coverdell account to a 529 plan. Unless there is another compelling reason to make the switch, such as when the beneficiary is about to turn age 30 and trigger the liquidation of the Coverdell account, you should probably leave the account alone at least until Congress decides to make permanent the exclusion for qualified withdrawals from a 529 plan. Otherwise you may be converting future tax-free Coverdell withdrawals into taxable 529 withdrawals.
Don't jump to the conclusion that the Coverdell account is a better investment than the 529 plan just because Coverdell accounts retain their tax-free status for college expenses after the year 2010. There are many other differences between these two competing college-savings vehicles. Also, be aware that the 2010 sunset will hit the Coverdell account just as hard, but for other reasons. For example, in 2011 you will no longer be able to claim both the Coverdell exclusion and the Hope or Lifetime Learning credit in the same year, and so most students will elect to pay tax on Coverdell withdrawals in order to obtain the more valuable credits.
If someone transfers their child's Coverdell education savings account to a 529 plan, and in 2010 the tax exemption for 529 plans expires, can the money be transferred from the 529 plan back to the Coverdell account? - CP
Answer: That sounds like a sensible solution to the problem of the 2010 ""sunset,"" CP, but unfortunately the transfer rule is a one-way street. You can put your Coverdell money into a 529 plan without triggering tax or penalty, but it doesn't work the other way around.
It is for this reason that you should not be too quick to transfer funds from a Coverdell account to a 529 plan. Unless there is another compelling reason to make the switch, such as when the beneficiary is about to turn age 30 and trigger the liquidation of the Coverdell account, you should probably leave the account alone at least until Congress decides to make permanent the exclusion for qualified withdrawals from a 529 plan. Otherwise you may be converting future tax-free Coverdell withdrawals into taxable 529 withdrawals.
Don't jump to the conclusion that the Coverdell account is a better investment than the 529 plan just because Coverdell accounts retain their tax-free status for college expenses after the year 2010. There are many other differences between these two competing college-savings vehicles. Also, be aware that the 2010 sunset will hit the Coverdell account just as hard, but for other reasons. For example, in 2011 you will no longer be able to claim both the Coverdell exclusion and the Hope or Lifetime Learning credit in the same year, and so most students will elect to pay tax on Coverdell withdrawals in order to obtain the more valuable credits.
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