Tax planning and compliance for investors
Free Online Guides
You can roll over a Coverdell account to a different financial firm, or move the money to a 529 plan.
The responsible individual can move the Coverdell account from one financial institution to another in a rollover. You simply take the money out of the existing account and transfer it to a new one, telling the new account provider this is a rollover contribution. Just as in the case of a traditional IRA, the rollover has to be completed within 60 days after you take the money from the old Coverdell account. It's best to act promptly so you have time within the 60-day limit to correct any errors that may occur in setting up the new account.
When you do a rollover, you have to wait at least 12 months from the date of the distribution before taking another rollover distribution.
Example: You take all the money from a Coverdell account on April 12, 2003 and on April 20, 2003 contribute the money to a new Coverdell account. You start another rollover by taking the money out of the second Coverdell account on April 15, 2004 and complete the rollover on April 18, 2004. The second rollover qualifies because the distribution occurred more than a year after the distribution for the previous rollover.
The rules for traditional IRAs permit another kind of transfer, called a trustee-to-trustee transfer, where the IRA assets go directly from one financial institution to another. This type of transfer doesn't count as a rollover, so you can make more than one transfer of a traditional IRA within a 12-month period using this technique. The IRS has not told us we can use this rule for Coverdell accounts, and until they do, you should assume that the 12-month waiting period applies to all transfers of Coverdell accounts, even if they take the form of a direct transfer.
The rollover rules for Coverdell accounts can also be used to change the beneficiary, as explained in our later page on changing beneficiaries.
You can't use the 60-day rollover rule to move money from a Coverdell account to a 529 plan, but there's another way to accomplish the same thing. A contribution to a 529 plan is considered a qualified education expense, just like money that was spent for tuition or other costs of education. That means you can take money out of a Coverdell account and put it in a 529 plan without paying tax. If you do this, you'll have to follow the 529 plan rules if you want to withdraw earnings tax-free: you won't be able to use this money for primary or secondary education, or for computer expenses. The earnings "transfer over" to the 529 plan so they'll be treated as earnings when money comes out of the 529 plan.
In essence, this rule allows you to do a rollover from a Coverdell account to a 529 plan, but with a different time limitation. When you move money from a Coverdell account to a 529 plan, you have to complete the transfer within the same calendar year, which may allow you more than 60 days — or less, if the money comes out near the end of the year.
|That Thing Rich People Do||The fastest, easiest way to learn the principles of investing.|
|Our complete guide to Roth IRAs and Roth accounts in 401k and similar plans: choosing, creating, building and using these accounts.|
|Consider Your Options|
|A plain-language guide for people who receive stock options or other forms of equity compensation.|
|Equity Compensation Strategies|
|A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.|
|Capital Gains, Minimal Taxes|
|Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.|