Taking Coverdell distributions in high school

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tenkuky
Posts: 579
Joined: Sun Dec 14, 2014 4:28 pm

Taking Coverdell distributions in high school

Post by tenkuky » Tue Jun 12, 2018 11:44 am

I have a 529 that is designated for post-secondary expenses, not intending to touch it prior, despite the recent law change allowing.
I originally had a small (~$8K) Coverdell education savings account that I put money in, before disallowance due to income.
I want to tap it sooner than the 529 to avoid headaches of rolling it over into the 529 later.
With DD in public high school, only expenses I can see are relatively small ones: $75 or so on tuition fees for some advanced programs every semester, and possibly dual-enrollment tuition in near future (?$2500).
Speaking of which, I didn't see anything in IRS Pub 970 that talks about dual enrollment of high school student in college and Coverdell, just AOTC. Help here?

My other question is: is it advisable to use a Coverdell for these, even though I could easily cash-flow these expenses?
Or let it grow (a little), and use first at college time?
I have the money in 40-60 Total Market-Total Bond ETF allocation now, but can slide to more cash anytime.

Finally: Is the 1099-R (and later 1098-T) process cumbersome, what receipt logs do I need to keep?

Thanks!

jarfykk
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Re: Taking Coverdell distributions in high school

Post by jarfykk » Tue Jun 12, 2018 1:21 pm

Besides tuition and whatnot, things like laptop computers, tablets, etc. are also eligible uses of a Coverdell ESA. Tutoring and related materials are also covered (e.g. SAT prep, etc.)

https://taxmap.irs.gov/taxmap/pubs/p970-022.htm

"The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. (This doesn't include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.)"

Look at Publication 970.

Also, perhaps not for your case given your child is close to college, but for those whose income exceed the allowable limit of the ESA contribution, you can gift the money to your child (e.g. to a custodial savings account or similar), and then have the child deposit the funds in their ESA. Every Christmas I go to my credit union, move $2k into each of my children's savings accounts, and then have cashier's checks drawn from those accounts and mail them to my ESA account brokerage. My accountant (and several online resources) noted this is just fine.

euroswiss
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Re: Taking Coverdell distributions in high school

Post by euroswiss » Tue Jun 12, 2018 3:17 pm

"I want to tap it sooner than the 529 to avoid headaches of rolling it over into the 529 later."


What headaches are you speaking of? I just rolled Coverdells into 529 for both of my children and it was very straightforward.

tenkuky
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Joined: Sun Dec 14, 2014 4:28 pm

Re: Taking Coverdell distributions in high school

Post by tenkuky » Tue Jun 12, 2018 6:43 pm

euroswiss: I was under the assumption it is a "distribution" then send check and confirm you did the right thing for taxes deal.
Is it just a simple "rollover" style transaction?
I actually have the ESA and 529 with different administrators so will that complicate things?

jar: thanks for clarification on what it can be used for. I never knew about the "child can contribute" and you are right it is too late for us.

I will probably do 1 distribution this year to pay for a few things just to get the hang of it, then wait till end of high school and roll into 529.

Jablean
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Re: Taking Coverdell distributions in high school

Post by Jablean » Tue Jun 12, 2018 7:00 pm

I did a Coverdell CD at our credit union. It always seemed to be the kid's more like a UTMA than a 529 and never appeared on my statements. DS was 18 going into college so credit union changed the format a bit so he can access it but it's all still in his name and I have no control over it. Plan, like you, is to use it first, then 529, then UTMA.

euroswiss
Posts: 223
Joined: Sun Oct 25, 2015 4:40 pm

Re: Taking Coverdell distributions in high school

Post by euroswiss » Wed Jun 13, 2018 8:18 am

tenkuky wrote:
Tue Jun 12, 2018 6:43 pm
euroswiss: I was under the assumption it is a "distribution" then send check and confirm you did the right thing for taxes deal.
Is it just a simple "rollover" style transaction?
I actually have the ESA and 529 with different administrators so will that complicate things?

jar: thanks for clarification on what it can be used for. I never knew about the "child can contribute" and you are right it is too late for us.

I will probably do 1 distribution this year to pay for a few things just to get the hang of it, then wait till end of high school and roll into 529.
My Coverdells were at Vanguard and my 529s are at NY Saves (New York 529). I initiated the transfer at NY Saves, just like any IRA rollover, and the process went without a hitch. I got the corresponding tax form from Vanguard at the end of the year (can’t recall the number of the form but basically reported the transaction). Had to enter the transaction on the tax form (the rollover is not a taxable event but a reportable event apparently).

47Percent
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Re: Taking Coverdell distributions in high school

Post by 47Percent » Wed Jun 13, 2018 9:23 am

Like Jar suggested, I have contributed to my son's ESA (Coverdell) from my son's UTMA in some years. But just to protect myself from some unknown, I opened separate ESA accounts for those contributions and the ones I do directly. UTMA itself covers school expenses adequately -- so I haven't touched either ESA's and don't plan to.

Come rollover time to 529, I have been advised that I should also roll it over to a separate 529 account and not comingle the monies. I have the flexibility to change the beneficiary for the 529 funded with my direct contribution, but the ones funded from my son's UTMA->ESA->529 is permanently tied to him.

euroswiss
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Re: Taking Coverdell distributions in high school

Post by euroswiss » Wed Jun 13, 2018 9:56 am

47Percent wrote:
Wed Jun 13, 2018 9:23 am
Like Jar suggested, I have contributed to my son's ESA (Coverdell) from my son's UTMA in some years. But just to protect myself from some unknown, I opened separate ESA accounts for those contributions and the ones I do directly. UTMA itself covers school expenses adequately -- so I haven't touched either ESA's and don't plan to.

Come rollover time to 529, I have been advised that I should also roll it over to a separate 529 account and not comingle the monies. I have the flexibility to change the beneficiary for the 529 funded with my direct contribution, but the ones funded from my son's UTMA->ESA->529 is permanently tied to him.
Right - you definitely need to be careful about co-mingling ESA and UTMA funds. OP didn't mention UTMA so I assumed they are dealing with "regular" ESA/529 situations though.

tenkuky
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Re: Taking Coverdell distributions in high school

Post by tenkuky » Wed Jun 13, 2018 9:57 am

Is the suggestion to rollover into a separate 529 due to comingling of monies from UTMA? We don't have UTMA.
Or is it generally suggested to rollover into separate if one has a 529 already?
How does one deal with "account closure" fees at the institution, in this case Schwab, perhaps leave a few $ in there in perpetuity to avoid?

Ha, euroswiss: we were thinking same thing at same time.

47Percent
Posts: 349
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Re: Taking Coverdell distributions in high school

Post by 47Percent » Wed Jun 13, 2018 10:22 am

Rolling over an ESA to a 529:

as far as I know, there is no need to open a separate 529 if the contribution money came from the same source -- that is you and not from a UTMA account.

I am unclear about ESA's funded/managed by grand parents and others and different custodians etc. But in straightforward cases where a parent is the custodian for an ESA and a 529, and both are funded by the parent custodian, there is no need to open a separate 529.

tenkuky
Posts: 579
Joined: Sun Dec 14, 2014 4:28 pm

Re: Taking Coverdell distributions in high school

Post by tenkuky » Wed Jun 13, 2018 10:53 am

47Percent wrote:
Wed Jun 13, 2018 10:22 am
Rolling over an ESA to a 529:

as far as I know, there is no need to open a separate 529 if the contribution money came from the same source -- that is you and not from a UTMA account.

I am unclear about ESA's funded/managed by grand parents and others and different custodians etc. But in straightforward cases where a parent is the custodian for an ESA and a 529, and both are funded by the parent custodian, there is no need to open a separate 529.
Aha!
And therein lies the catch. The ESA is in one parent name and the 529 in the other parent custodian.
What then? Should I switch custodian of one or other to streamline?

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