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Move Coverdell money into a 529

Chris Farrell Oct 20, 2010

Question: I opened a Coverdell savings account 2 years ago for my nephew (owned by his mom). On a recent Marketplace Money segment with Tess and Liz, I heard that some of the advantages of the account that drew me to it (e.g., using the funds for primary school) are going away at the end of the year. Can the Coverdell be rolled over into a 529 if we want? Tom, Charlotte, NC

Answer: Yes, unless Congress acts the Coverdell will be a much less attractive vehicle for tax advantaged school savings. For example, starting in 2011 the annual contribution limit into a Coverdell will plunge from $2000 to $500. The money will no longer be available to pay for primary and secondary school expenses, either. Like a 529 plan, Coverdell savings will go toward college beginning in 2011. The 529 plan is a more generous way to save for college..

You can move money from a Coverdell into a 529. There are some twists and turns to follow, but it isn’t that hard. In essence, since a contribution to a 529 plan is considered a qualified education expense you take the money out of the Coverdell account and place it in a 529 plan without paying tax. The money goes for the same beneficiary. You need to contact the 529 plan administrator to tell them what you’re doing and so that the plan accounts for the money properly. The tax-free switch has to be finished within the same calendar year.

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