A 529 College Savings Plan may be an attractive vehicle for
those looking to save for a child's education.¹ If you have already
committed college-earmarked assets to another type of financial vehicle, such
as a Coverdell Education Savings Account or a custodial account for a minor
beneficiary, you may want to investigate transferring those assets into a 529
plan.

Making the Move From a Coverdell

Amounts transferred from a Coverdell account to a
"qualified tuition program" (IRS lingo for a 529 plan) are viewed as
qualified education expenses by the IRS and are therefore tax free as long as the
amount of the withdrawal is not more than the designated beneficiary's
qualified education expenses.

There are several reasons why a college saver may want to take
this course of action.

• Consolidation with a more generous
  contribution limit: Whereas Coverdell accounts limit contributions to
  $2,000 per beneficiary per year, 529 plans typically allow much higher lifetime
  contribution limits in excess of $200,000 per beneficiary in many states.
• No income restrictions: Unlike
  Coverdells, 529 plans generally do not impose income limits that restrict the
  ability of higher-income taxpayers to contribute.
• No taxes or penalties: Moving assets
  from a Coverdell to a 529 does not trigger taxes or penalties.

But there are also some drawbacks. Keep in mind that Coverdells
and 529 plans are still relatively new, so legal and procedural precedents for
specific strategies may not be well established yet. Since the funds in a
Coverdell are owned by the beneficiary, any assets moved to a 529 plan owned by
a parent could be construed as a transfer of ownership from the beneficiary to
the parent. This could raise legal issues down the road if the parent
subsequently changes the beneficiary. What's more, Coverdells can be used to
pay for primary or secondary school costs, whereas 529 plans are limited to
college expenses.

Relocating UGMA/UTMA Assets

Many 529 plans accept rollovers from custodial accounts
established for minor beneficiaries, such as those created under the provisions
of the Uniform Gifts/Uniform Transfers to Minors Act (UGMA/UTMA). Be aware that
the money in an UGMA/UTMA account belongs to the minor, so any subsequent
withdrawals after a transfer to a 529 plan may only be used for that minor.
Also, since contributions to 529 plans must be in cash, UGMA/UTMA assets first
need to be liquidated, with any capital gains taxable to the minor.

Moving Savings Bond Assets

The third option for a transfer to a 529 plan involves cashing
in qualified U.S. savings bonds and contributing the proceeds to the plan, in
accordance with the guidelines established by the IRS and the Treasury
Department's Education Bond Program.² You can find more information
at the Treasury Department's Treasury Direct Web site: http://www.treasurydirect.gov/indiv/planning/plan_education.htm.

Source/Disclaimer:

¹ By investing in a 529 plan outside of the state
in which you pay taxes, you may lose the tax benefits offered by that state's
plan. Withdrawals used for qualified expenses are federally tax free. Tax
treatment at the state level may vary.

² Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely
payment of principal and interest, and, if held to maturity, offer a fixed rate
of return and fixed principal value.

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November 2011 — This column is provided through the
Financial Planning Association, the membership organization for the financial
planning community, and is brought to you by Ronald J VanSurksum, CFP® , a
local member of FPA.

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