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

Choose the right way to save money for her college education.

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With rising college costs, using tax-advantaged education accounts to save money is a smart move. Examples include Coverdell Education Savings Accounts and 529 plans, a qualified tuition program. You can establish a Coverdell ESA for anyone under 18 years old. The beneficiary doesn't have to be your child or have any other particular relationship to you. Contributions are limited to $2,000 per year per beneficiary and your income must not exceed the annual limits to contribute. A 529 plan, on the other hand, has no contribution limits each year and no income restrictions. However, while a Coverdell ESA permits unlimited distributions for elementary and secondary school expenses each year, 529 plans only allow a maximum of $10,000 for distribution each year for such expenses. Neither type of plan has a limit on the amount distributed each year for postsecondary expenses.

Permitted Transfers

A distribution from an ESA to a 529 plan counts as a qualified education expense and is therefore not subject to any taxes or penalties if the beneficiary of the 529 plan is the same as the ESA beneficiary or is a family member of the ESA beneficiary. Family members include a beneficiary’s sibling, child (including adopted children and stepchildren), parents and stepparents, children of a sibling, aunts and uncles, in-laws as well as the spouses of any of these family members. For example, if you have an ESA set up for your daughter, you can move the money from that ESA into a 529 plan for the benefit of your daughter, or any of your other children. You could even move it into a 529 plan that designates yourself as the beneficiary because you are your child’s parent.

Uses for Moving Coverdell ESA Funds to a 529 Plan

With a Coverdell ESA, the money in the account must be distributed within 30 days of the beneficiary turning 30 years old or the beneficiary’s death, if sooner. With a 529 plan, on the other hand, there are no such age limitations. If you have a beneficiary approaching the 30-year age limit for a Coverdell ESA, moving the money to a 529 plan for that beneficiary enables you to avoid those forced distributions. For example, if you have a daughter in medical school who is coming up on her 30th birthday but still has a few years of school to go, you could move the money from her Coverdell ESA to a 529 plan so she can continue to use it after she turns 30 for her remaining education expenses.

Alternatively, say your daughter had money left over in her Coverdell ESA after finishing school and you have a son who wants to go back to school despite being over 30 years old. You couldn’t simply change the beneficiary of the Coverdell ESA to your son because he is too old. However, you could move the money from the Coverdell ESA that names your daughter as the beneficiary to a 529 plan that names your son as the beneficiary because they are considered family members.

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About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."


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