My 529 and Coverdell Accounts are overfunded

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My 529 and Coverdell Accounts are overfunded

Postby rehoman » Thu Jan 31, 2013 12:45 pm

I have 2 college age children. Each has a Utah 529 and a Vanguard Coverdell. College costs are lower than expected and investment performance has exceeded my expectations.

After they both graduate, they will each have about $90,000 left over, for a total of $180,000. I will not need this money for retirement, so I'm thinking about various options to avoid penalties and taxes.

I understand that, at some point, I will be forced to liquidate the Coverdell (maybe 10 years after college??). Is this true? If so, should I exhaust the Coverdells and make sure the remaining $90,000 is in the 529 Plans?

Does a 529 require me to withdraw at some point, or can the account just sit and grow for decades, maybe to be used by grandchildren someday?

Any other strategies or suggestions would be appreciated. Thank you.

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Re: My 529 and Coverdell Accounts are overfunded

Postby JamesSFO » Thu Jan 31, 2013 12:51 pm

Some on the Coverdell rules here http://www.education.com/reference/article/coverdell-saving-transferring-account/ looks like 30 is a magic age, but you can change beneficiaries.

Do not believe 529s have a similar requirement.
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Re: My 529 and Coverdell Accounts are overfunded

Postby Rupert » Thu Jan 31, 2013 1:25 pm

The 529s can just sit and grow. You can change the names of the beneficiaries to your grandchildren or yourself or anybody. I recommend adding the names of my children as your beneficiaries. :) Congrats on saving enough and then some.
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Re: My 529 and Coverdell Accounts are overfunded

Postby letsgobobby » Thu Jan 31, 2013 1:46 pm

Most if not all 529s have no age limits. That may be plan specific - check with yours.

You can rollover an ESA to a 529, and it counts as a qualified distribution so no taxes. This is based on my vague recollection only, I don't have ESAs myself so haven't checked any details.

I think you can see what the strategy will be from there.
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Re: My 529 and Coverdell Accounts are overfunded

Postby lmpmd » Thu Jan 31, 2013 4:39 pm

I wouldn't lose a lot of sleep over overfunded 529's. Keep the money there for your grandchildren. Or take a bunch of courses in your retirement to learn about the world. Paying 10% penalty on the earnings isn't a great thing - but probably worse things could happen to you. It's better than getting run over by a truck.
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Re: My 529 and Coverdell Accounts are overfunded

Postby mikep » Thu Jan 31, 2013 5:15 pm

lmpmd wrote:I wouldn't lose a lot of sleep over overfunded 529's. Keep the money there for your grandchildren. Or take a bunch of courses in your retirement to learn about the world. Paying 10% penalty on the earnings isn't a great thing - but probably worse things could happen to you. It's better than getting run over by a truck.


I remember reading something about a generation skipping transfer tax but not sure.
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Re: My 529 and Coverdell Accounts are overfunded

Postby rehoman » Sat Mar 02, 2013 12:24 am

I just learned some upsetting news. My 529 and Coverdell are way overfunded. This never bothered me too much because I figured I could take the money out and pay a low capital gains tax rate.

I have learned that the capital gains will be taxed as ordinary income!! Of course, I would also have to pay a 10% penalty on the gain portion of the withdrawal. I may now just have to leave the accounts in place, until a grandchild comes along.

This kind of reminds me of a variable annuity, which also get taxed at ordinary income.
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Re: My 529 and Coverdell Accounts are overfunded

Postby letsgobobby » Sat Mar 02, 2013 1:37 am

Well... Of course you'll leave it for your grandkids. Wasn't that the point?
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Re: My 529 and Coverdell Accounts are overfunded

Postby expat » Sat Mar 02, 2013 2:47 am

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Re: My 529 and Coverdell Accounts are overfunded

Postby nydad » Sat Mar 02, 2013 9:06 am

re: leaving it for the grandkids: http://www.bogleheads.org/wiki/529_Plan_Account_Transfers#Beneficiary_Changes

My understanding is that a generation skipping tax would be levied in this case. It may be worth consulting with your tax accountant to understand the implications.

The idea of a car or apartment is a clever one. I'd also consult with a pro before going that route...
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Re: My 529 and Coverdell Accounts are overfunded

Postby letsgobobby » Sat Mar 02, 2013 11:16 am

there is still an annual gift tax exclusion.
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