Written by Marc R Barnes EA
November 29, 2010
Time to roll it over into a 529 plan?

Section 529 plans may only be used to pay for qualified higher education (post-secondary) expenses. Currently, Coverdell ESAs may be used to pay for qualified higher education expenses or qualified elementary and secondary education expenses (K-12). However, unless a new law extends this provision, Coverdell ESAs can no longer be used for K-12 expenses after 2010.

After 2010, it may be wise to roll your Coverdell ESA into a 529 plan. A distribution from a Coverdell ESA that is used for qualified education expenses is nontaxable. A contribution to a 529 plan is considered a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. In general, the distribution must be “rolled over” by December 31 of the same year.

Ultimately, you can contribute more to a 529 plan. The annual contribution limit for Coverdell ESAs is currently $2,000/year. After 2010, this limit is set to drop to $500/year. On the other hand, 529 plans have no annual contribution limits.* In addition, you can often deduct contributions to 529 plans on your state income tax return. Also, it is generally easier to change beneficiaries for 529 plans, and funds in Coverdell ESAs must be spent by the time the beneficiary turns 30 or the earnings become taxable and subject to a 10-percent penalty.

* Contributions over $13,000 require a gift tax return to report the taxable gift.

Topic: College