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Coverdell rollover after 30??

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  • Coverdell rollover after 30??

    I just discovered that my parents had a Coverdell ESA through E-Trade with me as the beneficiary. I am an EM physician in the top marginal tax bracket. My understanding is that rules change when the beneficiary turns 30. I am now 32 and wondering what to do with the balance of this account. I have a 529 plan in my son's name who is only a few months old. My understanding is that the account should have been withdrawn when I turned 30. And at that time a 10% penalty on earnings would have been excised.  Well, now what?  I am wondering if the account is withdrawn, what will the taxes and fees incurred be. My thought is that there will be a 10% penalty plus 20% capital gains on earnings. Also I am hoping there is a way to use 529 plans to avoid penalties and taxes.  Could I perhaps change my son to the beneficiary and rollover to his 529 plan?  Or, if E-trade does not allow changing the beneficiary, could I create a 529 plan in my own name and rollover the funds to that 529. Afterwards, I could change the beneficiary of my new 529 to my son. Any help is appreciated. There is just 2800 in the account. The basis is approximately 2000. 


  • #2

    You cannot roll a Coverdell ESA over to a 529 account; they are 2 different animals and cannot breed. Fortunately, this is a small amount. All I know for you to do is to empty the account and pay the tax and penalty. I’m sorry I can’t be of more help.

    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Thanks for the reply. And I agree, I am happy that amount is small. So if withdrawn, will the penalty only be on 800$?

      As far as doing a rollover, this is what I found on savingforcollege.com. So my thought was changing the beneficiary prior to a rollover might allow avoidance of penalty and taxes.

      "Can we move the funds from my child’s ESA into a 529 plan?


      Yes. A withdrawal from an ESA is tax-free to the extent that contributions are made to a 529 account for the same beneficiary in the same taxable year. Apparently it doesn’t matter if you use your own funds in contributing to the 529 plan when accomplishing this rollover (so that you can be the account owner) or if you use the funds received by your child from the old ESA (in which case it my be more proper that your child or legal representative be the account owner of the 529 plan). Of course if you use your own funds, then you still need to think about what to do with the ESA withdrawal funds in the hands of your child. Your choice of approach may also have different gift tax ramifications."

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      • #4
        Well, that is interesting! It somewhat conflicts with the research I had done but what they are describing is not a rollover. It is an exception to the rule for a withdrawal if you make a subsequent contribution to a 529. Semantics, though - right? I think you win that one.

        The problem I think you're going to run into is that you won't be able to change the beneficiary after you age 30. It doesn't make sense that you'd be able to circumvent the penalty by doing this. But take it up with the custodian and see what they say. Maybe I'm wrong.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          That's exactly what I was wondering. I'm surprised there wasn't a forced withdrawal on my 30th birthday or something to that effect. Anyway, not a big deal since I won't ever be using an ESA in the future.

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          • #6
            No, you can let it grow as long as you want. The penalty will just be larger the longer you wait.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              Got it. Thanks!

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