How to Transfer Assets to a 529 Plan

More families are putting aside more money to help pay for their children's college education as the costs are escalating on a yearly basis. Many families have set aside money in a Coverdell Education Savings Account or a custodial account and are able to make tax-free transfers from those accounts to a 529 college savings plan. Investors with certain types of U.S. savings bonds may also transfer these assets to a 529 plan tax free.

Difficulty: Moderate

Instructions

Transferring Assets to a 529 Plan

1. Gather and review the most recent statements for each of your college accounts.

2. Calculate, or recalculate, your college savings goal.

3. Ask family and friends about their experiences choosing a 529 plan.

4. When moving assets from a Coverdell, the IRS makes it clear in Publication 970, Tax Benefits for Higher Education, that amounts transferred from a Coverdell account to a "qualified tuition program" (IRS lingo for a 529 plan) are viewed as qualified education expenses and are therefore tax free, as long as the amount of the withdrawal is not more than the designated beneficiary's qualified education expenses.

Tips & Warnings

• Transferring assets to a 529 plan include their generous contribution limits and the lack of income limitations on contributors.
• Obtain and read a copy of IRS Publication 970, Tax Benefits for Higher Education.
• Shop around for a 529 plan with reasonable fees, flexible rules, and investments that are appropriate for pursuing your financial goal. Be sure to consider the plan in your own state, which may offer certain tax benefits.
• Seek the advice of a tax professional before deciding exactly which assets to transfer to your 529 Plan.
• You may determine that it's appropriate to fund more than one type of college savings account simultaneously, such as a Coverdell Education Savings Account and a 529 plan. Work with a financial and tax advisor before selecting your strategy.
• The transfer of assets from a child's custodial account to a 529 plan owned by a parent could be viewed as a transfer of ownership and could limit future uses of the money.