Vanguard retiring Coverdell ESAs

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mikep
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Vanguard retiring Coverdell ESAs

Post by mikep »

I received a letter from Vanguard today that they are soon ceasing to accept new contributions to Coverdell ESAs and encouraging rollovers to their 529 plan. They stopped new accounts a long time ago but kept existing accounts open.

When I started investing for college 15 years ago, ESAs were more flexible and the best place for the first $2000 of college savings contributions. 529s seemed scammy to me since there’s always an extra layer of state fees. My kids are 16 and 13.

Fast forward to today, it seems that fees have come down (but still a state fee nonetheless) and the rollover to 529 is the next best thing?

Any reason to keep my Vanguard ESAs open for my kids?

I have an Utah 529 for them as well, opened about 15 years ago. If I roll that to the Vanguard 529, does it restart the 15 year clock on the possible Roth IRA transfers?

If all else is equal, I’d rather consolidate at Vanguard for simplicity. From what I can tell, no difference in the Target enrollment portfolios in both plans.
Last edited by mikep on Mon Sep 18, 2023 9:21 pm, edited 1 time in total.
mvcjones
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Re: Vanguard retiring Coverdell ESAs

Post by mvcjones »

I have a Coverdell IRA and 529 plan at Vanguard. Both good plans, but, if you need access to a decent money market or similar type investment option, the Vanguard 529 plan does not offer one (the only option of this nature in the Vanguard 529 yields about 2.6%.). You can buy VMRXX or similar in the Coverdell IRA. Due to this Vanguard 529 limitation, I moved some of my 529 savings to another state 529 option, to get access to either VMRXX or VMFXX for the portion of my 529 savings I wanted to have in a lower risk, decent return option.
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Re: Vanguard retiring Coverdell ESAs

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mikep
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Re: Vanguard retiring Coverdell ESAs

Post by mikep »

Thanks.. is there any advantage (besides cost and investment flexibility) to keeping money in the ESA vs transferring to 529?

Finally, if a 529 is transferred to another 529, does that restart the 15 year clock for the Roth exit strategy? If that’s the case I think it would be best to just transfer the ESA to the Utah 529 plan I’ve had open since they were born.
Alan S.
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Re: Vanguard retiring Coverdell ESAs

Post by Alan S. »

The 2000 contribution limit per beneficiary is just too low for many to bother with, including custodians.
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mhc
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Re: Vanguard retiring Coverdell ESAs

Post by mhc »

I have ESAs and 529s with my kids at Vanguard. I called Vanguard to see how to move the ESAs to the 529s. They said I would have to fill out paper forms and mail them in. I told them I would do no such thing in the 21st century. If they want me to get rid of the ESAs, then they need to make it easy for me; otherwise, I'm keeping them until I use up the money for educational expenses.
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SteelyEyed
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Re: Vanguard retiring Coverdell ESAs

Post by SteelyEyed »

We have ESAs at Schwab, started after Vanguard stopped offering them. We have 529s elsewhere. The kids are still in K-12, but just this year, I started withdrawing as much as possible from the ESAs to pay for current education. In one to two years, I will completely deplete them. As I do so, I enjoy the tax-free withdrawal, then contribute similar amounts to the 529s, essentially resetting the cost bases.
RetiredCSProf
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Re: Vanguard retiring Coverdell ESAs

Post by RetiredCSProf »

I had an ESA at Janus and a 529 at Vanguard for my son. I depleted the ESA first, as it must be emptied by age 30, while the 529 has more flexibility.
privateID
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Re: Vanguard retiring Coverdell ESAs

Post by privateID »

There are no, and never have been, state tax deductions for ESAs. If you have an ESA, withdraw it and contribute to a 529, that money is eligible for a state tax deduction (at least in NY it is). So, I have been transferring my ESA to my 529 a little at a time ($10K/year to get NY's MFJ state tax deduction on 529 contributions).I have approx 4 more years to go to deplete the ESA account. That's the only reason I keep the ESA around.
Buford T Justice
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Re: Vanguard retiring Coverdell ESAs

Post by Buford T Justice »

I think there several private school benefits for long term ESAs:

There doesn't appear to be a $10k limit for withdrawals from ESAs like there is for 529s for high school students.

Say tuition is $16k per year for High School. I think you are allowed to withdraw $10k from a 529 account and withdraw the balance (6k) of tuition from the ESA account.
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mikep
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Re: Vanguard retiring Coverdell ESAs

Post by mikep »

mhc wrote: Tue Sep 19, 2023 9:57 am I have ESAs and 529s with my kids at Vanguard. I called Vanguard to see how to move the ESAs to the 529s. They said I would have to fill out paper forms and mail them in. I told them I would do no such thing in the 21st century. If they want me to get rid of the ESAs, then they need to make it easy for me; otherwise, I'm keeping them until I use up the money for educational expenses.
What can they do besides stop allowing new contributions? Can they force close it and send you a check? I guess I'll deal with it then.
It's the cheapest place to hold investments for college without enriching state treasurers, and I get no 529 state tax deductions.
I like to glide with the TR/LS funds and add cash reserves MM at 5.3% as college gets closer.

Every 529 will need a paper form to transfer.

Cash reserves in the NV 529 is 2.6%.. or the Utah FDIC insured/PIMCO stable value is a bit better.
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asset_chaos
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Re: Vanguard retiring Coverdell ESAs

Post by asset_chaos »

We have Coverdells and 529s at Vanguard for each child but have not recieved anything about Coverdells going away at Vanguard. We have not added to the Coverdells in a long time. When 529s started we front-loaded those and let them ride. That the equivilent lifestrategy fund in a Coverdell is a few basis points cheaper than the similar balanced fund in a 529 is the only reason I haven't investigated combining them. If Vanguard made it easy to roll a Coverdell into an existing 529 for the same child, I think I'd just go ahead and do it. We're spending from two 529s now. I don't know why it didn't occur to me to spend down the Coverdells first; I suppose I haven't thought about them in a long time.
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BK99
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Re: Vanguard retiring Coverdell ESAs

Post by BK99 »

Coverdell ESA has some big advantages over 529 plans.
- No limit on K-12 tuition, 529 has $10k limit
- Can be used all other K-12 qualifed expenses. 529 only used for tuition.
- ESA is self managed account, eligible to buy stocks, ETFs. 529s options extremely limited to lan selections.
- Right now you can get 5.25% on your parked money in an ESA money market. Can’t get close to that in a 529 plan.
- Highly recommend Vanguard grandfather existing ESA
accounts. Most Vanguard education investors likely hold both ESA and 529 plans in their account.
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mhc
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Re: Vanguard retiring Coverdell ESAs

Post by mhc »

mikep wrote: Tue Sep 19, 2023 7:23 pm
mhc wrote: Tue Sep 19, 2023 9:57 am I have ESAs and 529s with my kids at Vanguard. I called Vanguard to see how to move the ESAs to the 529s. They said I would have to fill out paper forms and mail them in. I told them I would do no such thing in the 21st century. If they want me to get rid of the ESAs, then they need to make it easy for me; otherwise, I'm keeping them until I use up the money for educational expenses.
What can they do besides stop allowing new contributions? Can they force close it and send you a check? I guess I'll deal with it then.
It's the cheapest place to hold investments for college without enriching state treasurers, and I get no 529 state tax deductions.
I like to glide with the TR/LS funds and add cash reserves MM at 5.3% as college gets closer.

Every 529 will need a paper form to transfer.

Cash reserves in the NV 529 is 2.6%.. or the Utah FDIC insured/PIMCO stable value is a bit better.
I don't know. I assume they just don't allow new contributions. If push comes to shove, I'll move them into the 529s. I have one in college and two in HS. I use the ESAs first.
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Nver2Late
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Re: Vanguard retiring Coverdell ESAs

Post by Nver2Late »

Can old ESA's (>15 years) be transferred to Roth like the 529s? Lots of articles discuss the 529s to Roth option, but most do not mention the ESA.

Another detail is it appears that contributions and earnings in the last 5 years can not be transferred to Roth, so it likely a complete account transfer to Roth is not possible without penalties. We have a small un-used old Vanguard ESA that I switched to 100% VTSAX at the Covid dip. Significant gains in the last 5 years. But this provision seems like it will make it so you cannot transfer all funds out to a Roth, unless we have a dip where the market is negative in a 5 year look back. Do I have this understanding correct?
"Better is the enemy of good." Good is good.
secondcor521
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Re: Vanguard retiring Coverdell ESAs

Post by secondcor521 »

mikep wrote: Mon Sep 18, 2023 10:29 pm Thanks.. is there any advantage (besides cost and investment flexibility) to keeping money in the ESA vs transferring to 529?

Finally, if a 529 is transferred to another 529, does that restart the 15 year clock for the Roth exit strategy? If that’s the case I think it would be best to just transfer the ESA to the Utah 529 plan I’ve had open since they were born.
On the first question, I don't think so. IRS Pub 970 has language now that says an ESA withdrawal that is contributed to a 529 is a qualified tax-free withdrawal. I also find no language saying such a transfer doesn't qualify as a 529 contribution, so like another poster I have been moving my state's $6K contribution limit from my one remaining ESA to that same kid's 529 each year and taking the state tax deduction on the $6K. So in that sense there is a tax benefit to moving the money. I don't need any of the differential tax benefits of the ESA, so for me that part is a no-brainer.

On the second question, nobody really knows yet. The 529->Roth rollover is a new law and the text is quite terse regarding the 15 year clock, so we all can hope for IRS for guidance on what counts and what doesn't. Since it uses the term "account" and "beneficiary", my opinion is that if I have any 529 for a particular kid, then moving it to a different state's 529 plan still counts as the same account. Others might have a more strict opinion that it would have to remain in the same state 529 with the same account number, which is a reasonable position as well.

Before the IRS provides guidance, I guess you have to make your own reasonable assumptions and decide how to proceed. It seems likely to me that this is an area where the IRS isn't going to be particularly strict. The spirit of the law is clearly for parents who started saving for college early, put their kids through college, and have leftover money because college costs are inherently unpredictable.
secondcor521
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Re: Vanguard retiring Coverdell ESAs

Post by secondcor521 »

Nver2Late wrote: Wed Sep 20, 2023 10:42 am Can old ESA's (>15 years) be transferred to Roth like the 529s? Lots of articles discuss the 529s to Roth option, but most do not mention the ESA.

Another detail is it appears that contributions and earnings in the last 5 years can not be transferred to Roth, so it likely a complete account transfer to Roth is not possible without penalties. We have a small un-used old Vanguard ESA that I switched to 100% VTSAX at the Covid dip. Significant gains in the last 5 years. But this provision seems like it will make it so you cannot transfer all funds out to a Roth, unless we have a dip where the market is negative in a 5 year look back. Do I have this understanding correct?
Not directly. The new 529->Roth rollover law is specific to 529's. You could do a tax-free transfer from the ESA to 529, and then from there to a Roth.

You can't do the transfer all at once anyway. It's limited to the annual Roth contribution amount each year, and $35K max per beneficiary lifetime. The idea seems to be that you'll make their Roth contributions from the 529 for the first five/six years they work. Since the five year period is a rolling lookback, draining the $35K from the 529 to the Roth over that five/six year timeframe should work just peachy. (It's not clear to me and I haven't read the law lately as to how the five year lookback works in terms of contributions vs. account growth. There are probably implementation details to work out in this area.)
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Re: Vanguard retiring Coverdell ESAs

Post by Nver2Late »

secondcor521 wrote: Wed Sep 20, 2023 10:55 am
Nver2Late wrote: Wed Sep 20, 2023 10:42 am Can old ESA's (>15 years) be transferred to Roth like the 529s? Lots of articles discuss the 529s to Roth option, but most do not mention the ESA.

Another detail is it appears that contributions and earnings in the last 5 years can not be transferred to Roth, so it likely a complete account transfer to Roth is not possible without penalties. We have a small un-used old Vanguard ESA that I switched to 100% VTSAX at the Covid dip. Significant gains in the last 5 years. But this provision seems like it will make it so you cannot transfer all funds out to a Roth, unless we have a dip where the market is negative in a 5 year look back. Do I have this understanding correct?
Not directly. The new 529->Roth rollover law is specific to 529's. You could do a tax-free transfer from the ESA to 529, and then from there to a Roth.

You can't do the transfer all at once anyway. It's limited to the annual Roth contribution amount each year, and $35K max per beneficiary lifetime. The idea seems to be that you'll make their Roth contributions from the 529 for the first five/six years they work. Since the five year period is a rolling lookback, draining the $35K from the 529 to the Roth over that five/six year timeframe should work just peachy. (It's not clear to me and I haven't read the law lately as to how the five year lookback works in terms of contributions vs. account growth. There are probably implementation details to work out in this area.)
For us, we do not have a 529 account, just an ESA remaining. If the 15 year clock then restarts on transfer to a new 529, it'll be 15 years before we can do the penalty fee Roth contribution. Probably not a reasonable option. Current plan was to just wait until D2 is 30 in case they go back to school and use it, otherwise, withdraw @ 30 and take the penalty, IF Vanguard let us keep the account.
"Better is the enemy of good." Good is good.
secondcor521
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Re: Vanguard retiring Coverdell ESAs

Post by secondcor521 »

Nver2Late wrote: Wed Sep 20, 2023 11:05 am
secondcor521 wrote: Wed Sep 20, 2023 10:55 am
Nver2Late wrote: Wed Sep 20, 2023 10:42 am Can old ESA's (>15 years) be transferred to Roth like the 529s? Lots of articles discuss the 529s to Roth option, but most do not mention the ESA.

Another detail is it appears that contributions and earnings in the last 5 years can not be transferred to Roth, so it likely a complete account transfer to Roth is not possible without penalties. We have a small un-used old Vanguard ESA that I switched to 100% VTSAX at the Covid dip. Significant gains in the last 5 years. But this provision seems like it will make it so you cannot transfer all funds out to a Roth, unless we have a dip where the market is negative in a 5 year look back. Do I have this understanding correct?
Not directly. The new 529->Roth rollover law is specific to 529's. You could do a tax-free transfer from the ESA to 529, and then from there to a Roth.

You can't do the transfer all at once anyway. It's limited to the annual Roth contribution amount each year, and $35K max per beneficiary lifetime. The idea seems to be that you'll make their Roth contributions from the 529 for the first five/six years they work. Since the five year period is a rolling lookback, draining the $35K from the 529 to the Roth over that five/six year timeframe should work just peachy. (It's not clear to me and I haven't read the law lately as to how the five year lookback works in terms of contributions vs. account growth. There are probably implementation details to work out in this area.)
For us, we do not have a 529 account, just an ESA remaining. If the 15 year clock then restarts on transfer to a new 529, it'll be 15 years before we can do the penalty fee Roth contribution. Probably not a reasonable option. Current plan was to just wait until D2 is 30 in case they go back to school and use it, otherwise, withdraw @ 30 and take the penalty, IF Vanguard let us keep the account.
I think the ESA->529 would restart the 15 year clock. If so, that probably rules that out for you as you said.

If the age 30 penalty is a concern, I'd look at rolling over whatever your state 529 tax benefit (if any) limit each year. ESA withdrawals that are put into a 529 are qualified tax free withdrawals from the ESA, and are eligible for any 529 state tax contribution benefit. Depending on your ESA leftover amount and the age of your D2, you could avoid most or all of the penalty that way.
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mikep
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Re: Vanguard retiring Coverdell ESAs

Post by mikep »

I think the 15 year clock is from the 529 opening date. There is a 5 year lookback on 529 contributions/earnings.. so I think if you transfer an ESA to an existing 529 opened at least 10 years ago, in 5 years you could then move that money to the Roth.

Of course its all speculation, without the text of the new law. Its possible that transferring 529s between custodians resets the 15 year clock as well.

New parents should open 529s at birth even if you fund with $1, to start the 15 year Roth clock. Maybe even multiple 529s if you think you will transfer money around between them.
Nohbdy
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Re: Vanguard retiring Coverdell ESAs

Post by Nohbdy »

BK99 wrote: Wed Sep 20, 2023 7:27 am Coverdell ESA has some big advantages over 529 plans.
- No limit on K-12 tuition, 529 has $10k limit
- Can be used all other K-12 qualifed expenses. 529 only used for tuition.
- ESA is self managed account, eligible to buy stocks, ETFs. 529s options extremely limited to lan selections.
- Right now you can get 5.25% on your parked money in an ESA money market. Can’t get close to that in a 529 plan.
- Highly recommend Vanguard grandfather existing ESA
accounts. Most Vanguard education investors likely hold both ESA and 529 plans in their account.
One can also buy CD’s in an ESA with no transaction costs.

It seems like CD rates are .25-.35 higher than notes and the expense ratio is zero on the CD.

The fees in general for 529 are higher.
ZWorkLess
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Re: Vanguard retiring Coverdell ESAs

Post by ZWorkLess »

Note, one disadvantage of leaving the funds in an ESA at Vanguard is that transferring money to a different family member becomes a several week process instead of a several day process.

A few weeks ago, I went to transfer money from OlderSibExtra ESA to YoungerSibInCollege ESA. I’d done that t several years ago from the OldestSib and it was painless and rapid. So when I went to do the exact same thing this summer, I wasn’t expecting a lengthy multi step process that took close to a month after we figured out how to do it at all.

Since they aren’t allowing new contributions to an ESA, I had to turn BOTH accounts into 529s, then transfer the older kid money from his old ESA to his new 529, then from there to to younger sib’s new 529. This involved four lengthy forms, a half dozen phone calls, and half a dozen Vanguard transactions. There was literally a form I printed, signed, and mailed to Vanguard that triggered Vanguard in one state to PRINT A PAPER CHECK zeroing out the ESA and then MAILInG it to a Vanguard office in a different state. And no, that paper check part isn’t due to some crazy comedy of errors. That’s part of the official ordinary process!!

Another issue is that they clearly don’t train any staff on ESA stuff. I was repeatedly told absurdly wrong information. I finally cracked and got snarky when a young man insisted that the only allowed transfer out of an ESA was if the beneficiary had died. When I clarified that he must be referring to a Vanguard policy, not a government law, bc that was plain wrong. He never did believe me. That was an absurd inaccuracy but I had similar but not crazy interactions with at least several different representatives. They don’t want this business, and they are no longer competent to service them.

Needless to say, I don’t advise leaving the funds in an ESA at Vantgard. Our educational money is now consolidated in one 529 that will get spent to zero within a few years. I’ll be glad to be done!!
longtalltexan
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Re: Vanguard retiring Coverdell ESAs

Post by longtalltexan »

mhc wrote: Wed Sep 20, 2023 9:41 am
mikep wrote: Tue Sep 19, 2023 7:23 pm
mhc wrote: Tue Sep 19, 2023 9:57 am I have ESAs and 529s with my kids at Vanguard. I called Vanguard to see how to move the ESAs to the 529s. They said I would have to fill out paper forms and mail them in. I told them I would do no such thing in the 21st century. If they want me to get rid of the ESAs, then they need to make it easy for me; otherwise, I'm keeping them until I use up the money for educational expenses.
What can they do besides stop allowing new contributions? Can they force close it and send you a check? I guess I'll deal with it then.
It's the cheapest place to hold investments for college without enriching state treasurers, and I get no 529 state tax deductions.
I don't know. I assume they just don't allow new contributions. If push comes to shove, I'll move them into the 529s. I have one in college and two in HS. I use the ESAs first.
I'm with you on this. My kids are both over 18, one of the accounts is 2+ decades old, yet VG sends a baffling letter about reducing "support" for such accounts. Are they hinting that they won't let you roll it over to a grandkid or other relatives if the kid turns 30 and doesn't spend it all? The letter doesn't say what, if anything, I MUST do or what I am FORBIDDEN to do from here on out other than I can't send more contributions -- which wasn't going to happen because of the existing rules.
Laff
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Re: Vanguard retiring Coverdell ESAs

Post by Laff »

For those of you who did the ESA-to-529 rollover, how long did the process take? I sent in a form, Vanguard emptied out the ESA, but it’s been a week and the funds still haven’t shown up in the 529.
woozone
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Re: Vanguard retiring Coverdell ESAs

Post by woozone »

I started the rollover process from ESA to 529 in October (mailing in the form), and they didn't process it until 12/1. BUT, they put in the trade date of early November, which essentially wipes out about 1.5k of increased equity that should have been applied. I'm going back and forth with customer service on this issue, and it seems rather strange that their trade date and processing date (after the big run in November) are a month apart.
meehawl20231214
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Re: Vanguard retiring Coverdell ESAs

Post by meehawl20231214 »

That's a shame. Found the annual $2K contrib limit frustrating but a minor inconvenience. I have been pleased with doing annual rollovers of high amounts of education savings bonds into Coverdells. That's what goes in "Box 2" on Form 5498-ESA. They are basically like a backdoor Roth for the kids that matures at age 30, and then must be rolled over into 529 or pay the extra drawdown tax.
Laff
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Re: Vanguard retiring Coverdell ESAs

Post by Laff »

My rollover was completed shortly after I posted, ten days after I mailed them the form. They initially showed the entire rollover amount as earnings, but I called and sent them proof of contributions. They fixed that pretty quick. No complaints so far.
woozone
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Re: Vanguard retiring Coverdell ESAs

Post by woozone »

meehawl20231214 wrote: Fri Dec 15, 2023 12:58 pm That's a shame. Found the annual $2K contrib limit frustrating but a minor inconvenience. I have been pleased with doing annual rollovers of high amounts of education savings bonds into Coverdells. That's what goes in "Box 2" on Form 5498-ESA. They are basically like a backdoor Roth for the kids that matures at age 30, and then must be rolled over into 529 or pay the extra drawdown tax.
Do we need to stay under the income threshold for savings bonds rollovers to 529s? Or can you roll it into a 529 despite having a high income?
Laff
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Re: Vanguard retiring Coverdell ESAs

Post by Laff »

woozone wrote: Sat Dec 16, 2023 3:27 pm Do we need to stay under the income threshold for savings bonds rollovers to 529s? Or can you roll it into a 529 despite having a high income?
MAGI must be less than $167,800 MFJ to be able to exclude interest on the bonds. See https://www.irs.gov/pub/irs-pdf/f8815.pdf.
meehawl20231214
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Re: Vanguard retiring Coverdell ESAs

Post by meehawl20231214 »

woozone wrote: Sat Dec 16, 2023 3:27 pm Do we need to stay under the income threshold for savings bonds rollovers to 529s? Or can you roll it into a 529 despite having a high income?
No. The MAGI threshold is only to enable exclusion of tax on the interest. You still have to be concerned about annual gift tax limits.
FanofVan
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Re: Vanguard retiring Coverdell ESAs

Post by FanofVan »

Anyone happen to save a copy of the letter from Vanguard last summer about stopping taking new money in Vanguard ESAs?

Now, they have not only stopped taking new money, but also now one can't buy new things with one's existing $$ inside existing Vanguard ESAs.

I understand why they aren't taking new money if they are hoping to shut down ESAs, but I was surprised about the restriction about buying new things (I was just trying to buy some T bills with cash in the money market fund). One can sell things, one can spin the ESA into a 529, or one can transfer to another ESA provider (e.g. Fidelity, Schwab).

I called (twice) and asked, and they said that they couldn't sent me a copy of the letter from last summer. I wanted to confirm that the letter had said that no purchases would be permitted with existing funds. The lack of a response (the stonewalling) is disconcerting.

Thanks for any info.
Buford T Justice
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Re: Vanguard retiring Coverdell ESAs

Post by Buford T Justice »

I have the letter dated September - October 2023. It indicates that "It's become clear that we won't be able to support these accounts to the same level going forward.... We will not be accepting additional contributions to ESAs for the 2024 tax year, so we're helping all account holders transition to another savings alternative."

Then it's blah, blah blah about 529's.
JBTX
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Re: Vanguard retiring Coverdell ESAs

Post by JBTX »

Would moving a vanguard ESA to a fidelity 529 be subject to Vanguards new transfer out fees starting in July?
exodusNH
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Re: Vanguard retiring Coverdell ESAs

Post by exodusNH »

FanofVan wrote: Mon Jun 03, 2024 7:27 pm Anyone happen to save a copy of the letter from Vanguard last summer about stopping taking new money in Vanguard ESAs?

Now, they have not only stopped taking new money, but also now one can't buy new things with one's existing $$ inside existing Vanguard ESAs.

I understand why they aren't taking new money if they are hoping to shut down ESAs, but I was surprised about the restriction about buying new things (I was just trying to buy some T bills with cash in the money market fund). One can sell things, one can spin the ESA into a 529, or one can transfer to another ESA provider (e.g. Fidelity, Schwab).

I called (twice) and asked, and they said that they couldn't sent me a copy of the letter from last summer. I wanted to confirm that the letter had said that no purchases would be permitted with existing funds. The lack of a response (the stonewalling) is disconcerting.

Thanks for any info.
Since they can change the rules at any time, does it really matter?

It's clear they'd rather you go elsewhere. It might be worth doing before July 1 to avoid the potential for an account closure fee.
FanofVan
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Re: Vanguard retiring Coverdell ESAs

Post by FanofVan »

"...one can transfer to another ESA provider (e.g. Fidelity, Schwab)."

Current brokerages offering ESAs include Schwab or E*trade. I was mistaken - Fidelity does NOT offer ESAs.
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Re: Vanguard retiring Coverdell ESAs

Post by mhc »

Does someone have a link to the document to fill out to convert the ESA to 529 at Vanguard? I can't find it on the website.
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Re: Vanguard retiring Coverdell ESAs

Post by vshun »

When I got this letter, I moved the money to my state (VA) which despite slightly higher ER gives tax break to make up for it. Ironically, this was beginning of the end of my accounts with Vanguard as I moved the other accounts to Fidelity later on and kids did the same, after being with them for 25 years. I still hold VT and similar funds at Fidelity especially in taxable, but new money goes to Fidelity zero ER funds.
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Re: Vanguard retiring Coverdell ESAs

Post by Nver2Late »

I received a new letter last week indicating that Vanguard will cash-out/close the ESA account at the end of (edit 2025). We were trying to use ours up this fall for D2, but they took a break from college instead.

I’m unclear on if the forced cash-out would be paid/taxable/penalty to her or us at end of year. I’m also confused if basis matters. We have a 7500 remaining balance and a 2500 basis. I’m leaning toward just letting it cash out, which unfortunately the penalty hammers the lifetime return on the account, but for such a small amount, I’m not sure it’s worth transferring and adding a 5th financial institution.

I really wish they’d let it ride and allow us to use it up, but that is their business decision.
Last edited by Nver2Late on Thu Oct 24, 2024 8:44 am, edited 1 time in total.
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Re: Vanguard retiring Coverdell ESAs

Post by FanofVan »

I received a similar letter, which indicates that the accounts will be closed at the end of 2025, not 2024.
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Re: Vanguard retiring Coverdell ESAs

Post by Nver2Late »

FanofVan wrote: Thu Oct 24, 2024 8:29 am I received a similar letter, which indicates that the accounts will be closed at the end of 2025, not 2024.
I misread my letter. Thanks for pointing that out. Gives us more time.

Thanks.
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Re: Vanguard retiring Coverdell ESAs

Post by FanofVan »

The letter also states that the ESAs are on the legacy investment platform - but the ESA already shows as a brokerage account. I thought the legacy system was for mutual funds. I don't think Vanguard would lie to us, but maybe they are eliding something.

As NJ residents, the ESAs are treated as regular brokerage accounts, so selling individual positions may not trigger Federal taxes, but they will be taxable events for our NJ return.
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Re: Vanguard retiring Coverdell ESAs

Post by mhc »

I converted our ESAs to existing 529s earlier this year. It is a hassle to fill out the forms and mail them in, but not too bad. I wish it could have all been done electronically.
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Re: Vanguard retiring Coverdell ESAs

Post by asset_chaos »

Drat, I've still not received letter one from Vanguard about closing ESAs. I did start to spend down two of them, but the third child won't start until after 2025. Maybe I should be more proactive and ask them how to fold an ESA into a 529. To the compose button.
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Re: Vanguard retiring Coverdell ESAs

Post by dale77 »

My turn to receive the letter today. I'd prefer to keep the money as an ESA than transfer it to a 529 (which I also have), but now neither of my two primary brokerages (Vanguard and Fidelity) will be offering them. Any suggestions for somewhere else to open a new ESA?
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Re: Vanguard retiring Coverdell ESAs

Post by audiamus »

For those that rolled a Vanguard ESA into another institution's 529 (Fidelity's, for example), were the principal and earnings amounts appropriately transferred?
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Re: Vanguard retiring Coverdell ESAs

Post by Nohbdy »

dale77 wrote: Mon Oct 28, 2024 4:52 pm My turn to receive the letter today. I'd prefer to keep the money as an ESA than transfer it to a 529 (which I also have), but now neither of my two primary brokerages (Vanguard and Fidelity) will be offering them. Any suggestions for somewhere else to open a new ESA?
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Re: Vanguard retiring Coverdell ESAs

Post by asset_chaos »

I did message Vanguard about rolling an ESA into a 529, both with the same beneficiary and both at Vanguard. Their reply (slightly abridged),
You can move assets from your Vanguard education savings account (ESA) to The Vanguard 529 Plan without incurring federal tax as long as the beneficiary (student) is the same on both accounts. Under IRS rules, this transaction will be treated as a distribution (a qualified education expense) from your ESA and a contribution to your 529 plan.

For your convenience, you may initiate a direct transfer of your ESA assets by completing and mailing a Vanguard 529 Plan Incoming Rollover Form, which can be requested or printed online at the link provided below. To make a direct transfer, the 529 account owner must be the same authorized parent or legal guardian listed on the Vanguard ESA. A signature guarantee is not required on the form.

https://personal.vanguard.com/us/litera ... over%20Kit

If you prefer, you can contact Vanguard to request the ESA distribution and have the funds sent directly to you. You would then need to make a check for the same amount payable to "The Vanguard 529 College Savings Plan," and forward it with a 529 account investment slip to ...

You can request a distribution from your Vanguard ESA online at www.vanguard.com or by telephone.

Note: For tax purposes, you will need to provide The Vanguard 529 Plan with documentation of your ESA principal (total amount contributed) and earnings. The plan will accept a signed letter of instruction from the account owner or the ESA firm. Until this information is received, the full amount of your contribution will be treated as earnings.

About ESA withdrawals >>
*If you are subject to the $25 annual account service fee on any ESA fund that you close, the fee will be deducted from the redemption proceeds.
*An IRS Form 1099-Q will be issued in January reporting the total amount of your ESA distributions for the previous year. You will want to maintain documentation to verify your qualified 529 contribution.
I filled out, signed, scanned the form, and returned it to Vanguard through their secure messsaging. We'll see how long the rollover takes, or if they insist I post the wet signature form to them. The phrase "completing and mailing" worries me a little.

So far the procedure seems easy enough for a Vanguard to Vanguard exchange; although, it would be nicer if one could do a Vanguard to Vanguard rollover entirely online. If rolling from a non-Vanguard ESA that required a signature guarentee, that would be a lot more hassle.

PS---I still got no mention that the ESAs were going away next year.
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Re: Vanguard retiring Coverdell ESAs

Post by White Coat Investor »

mikep wrote: Mon Sep 18, 2023 9:03 pm I received a letter from Vanguard today that they are soon ceasing to accept new contributions to Coverdell ESAs and encouraging rollovers to their 529 plan. They stopped new accounts a long time ago but kept existing accounts open.

When I started investing for college 15 years ago, ESAs were more flexible and the best place for the first $2000 of college savings contributions. 529s seemed scammy to me since there’s always an extra layer of state fees. My kids are 16 and 13.

Fast forward to today, it seems that fees have come down (but still a state fee nonetheless) and the rollover to 529 is the next best thing?

Any reason to keep my Vanguard ESAs open for my kids?

I have an Utah 529 for them as well, opened about 15 years ago. If I roll that to the Vanguard 529, does it restart the 15 year clock on the possible Roth IRA transfers?

If all else is equal, I’d rather consolidate at Vanguard for simplicity. From what I can tell, no difference in the Target enrollment portfolios in both plans.
No surprise. I'm actually surprised they lasted as long as they did. I had one once, but rolled it into the Utah 529 many years ago when I moved to Utah.
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