Over funded college in 529 and Coverdell, options for withdrawal?

[SnowballCamper]

The current plan has DD with excess left over at graduation, and I'm looking for creative ways to get it out.

About 70k in the WA 529 GET (Guaranteed Education Tuition) plan. This only grows as fast as public school tuition rates in state so we'll start spending it first.
About 45k in a Coverdell (self directed brokerage 66/33 stocks/treasuries)

The three year plan is about 78k, leaving about 37k left.

As I understand the Coverdell is distributed at age 30, regardless of balance, and income tax plus 10% penalty is due. This penalty is what I want to avoid.

The alternative is to transfer from the GET to DD's IRA (up to annual limits and a lifetime limit of 35k), so at least a five year operation. This is delayed because DD doesn't have enough income to qualify for the full contribution. Meanwhile the growth of the GET is very slow.

Of course DD could just keep the GET, but rolling it over to something with more investment options resets the clock on how long the funds have to be in place before a rollover to an IRA.

The only relatives for which a transfer is an option are some cousins over a decade away from college. Of course it could just be DD's problem in a decade, when she hits 30.

So what would you do? Is there some option I'm missing?

Thanks

 

[FlaGator]

I have 2 kids, contributed early in their lives to every available college savings vehicle. We were later-in-life parents and the goal was to ensure their school would be paid for no matter what happened to us. That ended up being useful planning and it was one less concern I had as an ER single parent. But now my "opportunity" is a multiple of yours.

I drew down the Coverdell/ESAs as quickly as I could as the age limit reduces their lifetime flexibility. I also started 529->Roth conversions, so that will help. When the last one finishes in a few years, the remaining balance will still be substantial. It will be in 529s, so could be held and used for their grad school, spouses, or future kids, if any. I'm taking a 5-10 year view of this, thinking by the time they are in their early 30's, any of those potential uses of that money will be underway or clear that it will/will not happen. If none of those thing materialize, I'll liquidate the accounts and pay the taxes.

I've named each of them as the successor owner of the other's account with instructions to aggregate and split 50/50 if I'm gone and none of the potential future uses have come to pass.

I your situation, I would consider rolling over the Coverdell to a 529 now. That extends the preferred status of the funds and opens up future uses. You can withdraw $$ from it as you are from the Coverdell. If the GET account is legally a "529 Plan", I would check the status of rolling over to another 529 if that *does not* reset the clock for Roth conversion purposes. Alternatively, use the funds now, but leave enough in it to use for the 529->Roth conversions. You can deal with the remaining balance in the Coverdell/529 rollover later.

Hope this helps.

 

[SecondCor521]

The current plan has DD with excess left over at graduation, and I'm looking for creative ways to get it out.

[snip]

So what would you do? Is there some option I'm missing?

Thanks

I would roll the ESA into a 529 for her benefit - either her existing 529 or another one. This transfer is tax-free if done properly because 529 contributions are treated as qualified educational expenses for the purposes of ESA distributions:

"Contributions to a qualified tuition program (QTP). A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary."

-- IRS Pub 970 page 39 at https://www.irs.gov/pub/irs-pdf/p970.pdf

That will (a) avoid the penalty, and (b) combine accounts.

I would then do the $35K worth of 529->Roth rollovers, even if it takes 10 years or longer - just whatever her earned income allows. That should take care of most of the excess.

If you're not happy with her existing 529 plan, you could always do a rollover to another 529 plan.

If you have money left over after that, you could distribute it to her and claim the scholarship exception to avoid the 10% penalty, assuming she earned scholarships enough to qualify for that exception. She would just owe ordinary income tax on the earnings portion of the leftover amount.

Or transfer it to a family member, or save it for her grad school.

You should also make sure you're using the 529 money for all eligible expenses. See IRS Pub 970 link above Chapter on QTPs to see what is eligible - tuition, books, fees, computer equipment, and room and board if more than half time.

You didn't ask, but it's probably worth your while to coordinate your 529 distributions with the American Opportunity Tax Credit, even if that means more leftovers.

 

[SnowballCamper]

Thanks for the suggestions so far. It looks like I should find a 2nd 529 plan and roll the coverdell into it to have the most flexibility.

 

[NgineER]

How about rolling it over to a future grandchild? That could present itself as a huge gift to your child at that point.

 

[livingalmostlarge]

I would get out of the ESA (which I have and like a lot) to a 529. Then can you get out of the GET? I don't understand enough to make a suggestion.

 

[hotwired]

The current plan has DD with excess left over at graduation, and I'm looking for creative ways to get it out.

About 70k in the WA 529 GET (Guaranteed Education Tuition) plan. This only grows as fast as public school tuition rates in state so we'll start spending it first.
About 45k in a Coverdell (self directed brokerage 66/33 stocks/treasuries)

The three year plan is about 78k, leaving about 37k left.

As I understand the Coverdell is distributed at age 30, regardless of balance, and income tax plus 10% penalty is due. This penalty is what I want to avoid.

The alternative is to transfer from the GET to DD's IRA (up to annual limits and a lifetime limit of 35k), so at least a five year operation. This is delayed because DD doesn't have enough income to qualify for the full contribution. Meanwhile the growth of the GET is very slow.

Of course DD could just keep the GET, but rolling it over to something with more investment options resets the clock on how long the funds have to be in place before a rollover to an IRA.

The only relatives for which a transfer is an option are some cousins over a decade away from college. Of course it could just be DD's problem in a decade, when she hits 30.

So what would you do? Is there some option I'm missing?

Thanks

I've read and heard that the 15 year reset has not been decided. "Guidance from IRS". People who understand the spirit of this law (i.e. being able to move 529 to ROTH) say that it's very likely there will be no 15 year reset. It would violate the spirit of the law completely. My accountant says, "better assume the worst", si I'm going to probably slide the max into DDs ROTH this year, but I'm betting that this time next year I'll be planning to slide it into mine. FYI. These transfers are NOT subject to income limits. (I.e if you make 300k and can't contribute to a roth, and 529 is fbo you? You can make the transfer)