Q. I have also overfunded my son's ESA since the education expenses are lower with in-state tuition. He is graduating next year, so I plan to rollover his ESA to my daughter's. Will there be any tax implication with the rollover?
A. No, if you follow the rules carefully. "If both siblings have 529 plans, you might want to consider a rollover. The distribution will be tax-free if the same amount is contributed to the other sibling’s 529 plan within 60 days. The IRS allows one tax-free rollover in a 12-month period.
Another option is to change the beneficiary on the 529 plan account. 529 plans allow the account owner to change the beneficiary to a qualifying family member (sibling qualifies) of the current beneficiary without tax consequences."
Reference: https://www.savingforcollege.com/article/how-to-transfer-529-plan-funds-to-a-sibling
Q. We plan to have non-qualified education withdrawal, from our daughter's 529 for the scholarship portion (her scholarship only covers tuition) penalty free from her 529 plan and have that amount sent to the parent bank account. How should I file for tax in this situation?
A. You claim the earnings portion of the distribution as income on line 8z of Schedule 1. You file form 5329 to claim the penalty exception on lines 5-8 (Part II).
It can get complicated, in TurboTax. I recommend a workaround:
Enter the 1099-Q. When asked who the student is answer: someone else not listed here (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Also enter the amount of the scholarship in the box "Tax-free assistance". This reports the earnings as taxable and claims the scholarship exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception.
