Can You Roll Over a 401(k) to a Coverdell?

You have several workable options for saving the significant amount you need to pay for the college education of your children. However, rolling a 401(k) plan into a Coverdell education savings account isn't one of them. Tax rules don't allow for a direct penalty-free rollover to Coverdell accounts. The two savings vehicles are taxed very differently. But you have other choices for saving for college.

Coverdell Education Savings Accounts

Unlike 401(k) plans, Coverdell education savings accounts (ESAs) are funded with after-tax contributions. Growth is tax-free, and distributions for qualified education-related expenses are tax-free as well. You do have to take distributions not later than 30 days after the beneficiary's 30th birthday or the government will charge income tax and a 10 percent penalty on the whole account.

401(k) Withdrawals

If your employer's plan allows, you may be able to take a hardship withdrawal from your 401(k) plan at work to pay college expenses. Plan documents specify whether you are eligible for hardship withdrawals while in service. You will still have to pay income tax on any withdrawals, but you may not have to pay the 10 percent penalty on early withdrawals if you are younger than 59 1/2 (or age 55, if you have already retired).

Rollover to an IRA

If you have left your company or if your plan allows for in-service withdrawals, you may also roll your 401(k) balance to a traditional IRA. IRAs allow penalty-free withdrawals to pay for education-related expenses, but you will still have to pay income tax on amounts withdrawn.

Considerations

Grants, loans and scholarships are available to help pay for college expenses, and they provide an option to taking money from retirement accounts. For a more detailed look at tax-advantaged college funding options, consult IRS Publication 970, Tax Benefits for Higher Education.