Coverdell to 529

A Coverdell Education Savings Account (ESA) is a tax-advantaged account used for saving for a child’s educational expenses. Withdrawals are fully tax-exempt if used for qualified K-12 higher education costs; however, if not, the beneficiary will be subject to income tax on the earnings plus a 10% penalty.  

All funds must be used or distributed by the time the beneficiary reaches age 30, unless they are a special needs beneficiary.

You can transfer a Coverdell to another child if the new beneficiary is a qualified family member of the current child and is under 30.  

Unlike with 529 Plans, you cannot roll Coverdell accounts into a Roth over time up to the annual contribution limits, with a lifetime maximum of $35,000. With a 529 Plan, under the SECURE 2.0 Act, effective January 1, 2024, you can roll the annual Roth contribution amount out of the 529 and into a Roth for the beneficiary up to a lifetime contribution of $35,000. There are some strict rules like the 529 account must have been open for at least 15 years, contributions and earnings from the past 5 years cannot be rolled, rollovers are subject to annual Roth IRA contribution limits, and the beneficiary must have earned income for the year. The 2026 Roth IRA contribution amount for individuals under age 50 is $7,500.

If you have a Coverdell and a 529, it may make sense for you to consider transferring the Coverdell into the 529 to allow those funds to be eligible for the Roth strategy. Keep in mind that the Coverdell transfer is subject to the 5-year rule wherein contributions and earnings from the past 5 years canned be rolled. You would have to wait to roll these funds to a Roth for those 5 years.

There are several factors that would contribute to whether this makes sense for your personal situation. We'd love to discuss this further with you, so please do not hesitate to reach out.