Advanced Underwriting Consultants

Ask the Experts – January 28

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: Can a Coverdell Educational Savings Account be rolled over into a Section 529 qualified tuition program?

Answer: Technically, no—a Coverdell may only be rolled over into another Coverdell for the same beneficiary or a family member of the beneficiary. However, there is another way to achieve the same result: the account holder could withdraw the funds from the Coverdell and, within the same year, contribute such funds into a 529 plan on behalf of the same beneficiary.

Here’s how it works. Distributions from Coverdell accounts are income-tax-free if the funds are applied toward qualified educational expenses—typically tuition, books and other educational costs. A contribution to a 529 plan from a Coverdell on behalf of the same beneficiary is considered a qualified educational expense as long as the transaction is completed within the same calendar year.

There are no yearly contribution limitations on how much an individual can contribute to a 529 plan, so the account holder could distribute the entire Coverdell account into a new 529 plan if he wanted.

The combination of these rules effectively allows a Coverdell account holder to roll over his entire account balance into a 529 plan.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.