Can I Move the Funds From My Child’s ESA Into a 529 Plan?

An educational savings account, also called a Coverdell ESA account, and a 529 college savings account are similar ways to set aside money for a student to use for college tuition. Neither offers deductions from income taxes on contributions, but money in either type grows tax-free, and distributions, including earnings, are tax-exempt if used for educational expenses. Contributions to ESAs, however, are limited to $2,000 a year, while there are no limits on 529 contributions. In most cases, you can move money from an ESA to a 529.

Same Account Holder

You can move funds from a Coverdell ESA into a 529 savings account tax-free in most cases. Both accounts must have the same account holder and the same beneficiary. If an ESA is in your name for a specific child, and you set up a 529 in your name for the same child, the transfer is not a taxable distribution of ESA funds. Any withdrawals from the ESA must benefit the named child.

Gift Tax

One possible limitation on converting ESA funds to a 529 account is the federal gift tax, which limits gifts from one individual to another to $13,000 a year. However, a Coverdell account owner can shift up to $65,000 by treating the entire amount as five equal gifts. The ESA account owner has to file a gift tax return for each of the five years, but no tax is levied in such a case.

Contribute to Both

An account owner also can contribute to both a Coverdell and a 529 account the same year. Coverdell money is not restricted to use for college but can be used at almost any public, private or religious elementary, secondary or higher-education institution. A 529 plan can be either a savings account or a prepaid tuition plan, which may be restricted to specific schools, but either type is limited to higher education.

Plan Differences

A Coverdell ESA is set up with a bank, mutual fund or other financial institution. A 529 plan is state-sponsored, although all 50 states offer at least one type. Not all states, however, offer both savings and prepaid plans, so a Coverdell transfer needs to go into a similar college savings plan. There are no residency requirements for 529 savings, so a parent could transfer Coverdell funds into an appropriate 529 in another state.

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About the Author

Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.

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