topic We rolled funds out of my son's Coverdell ESA account last year and deposited them into a 529 account how do I report the information on my 1099 Q in Get your taxes done using TurboTax

We rolled funds out of my son's Coverdell ESA account last year and deposited them into a 529 account how do I report the information on my 1099 Q

Shanny772 — Thu, 06 Jun 2019 05:31:49 GMT

This is a bit complicated, but unavoidably so. You ca...

ToddL — Thu, 06 Jun 2019 05:31:51 GMT

This is a bit complicated, but unavoidably so.

You can't use the 60-day rollover rule to move money from a Coverdell account to a 529 plan, but there's another way to accomplish the same thing.

A contribution to a 529 plan is considered a qualified education expense, just like money that was spent for tuition or other costs of education. That means you can take money out of a Coverdell account and put it in a 529 plan without paying tax. Entering it is a little messy (see "Important", below).

If you do this, you'll have to follow the 529 plan rules if you want to withdraw earnings tax-free: you won't be able to use this money for primary or secondary education, or for computer expenses. The earnings "transfer over" to the 529 plan so they'll be treated as earnings when money comes out of the 529 plan.

In essence, this rule allows you to do a rollover from a Coverdell account to a 529 plan, but with a different time limitation. When you move money from a Coverdell account to a 529 plan, you have to complete the transfer within the same calendar year, which may allow you more than 60 days — or less, if the money comes out near the end of the year."

http://fairmark.com/college/saving/coverdell/moving.htm

Important: One of the last interview screens is "Distribution Transfer - Did you roll over or transfer all or part of this distribution within 60 days to another Coverdell ESA?" The correct answer is "No" and this will trigger tax on the earnings component, however, if your child is not yet a college student you won't be able to enter the distribution as a "qualified education expense" (the right answer but you won't get to the interview). The only work-around I have found is to just answer "Yes" when it asks "Did you roll over or transfer all or part of this distribution within 60 days to another Coverdell ESA?"

Another important step though not on your return - For transfers from a Coverdell Education Savings Account, provide the 529 plan with an account statement issued by the financial institution that acted as trustee or custodian showing contributions and earnings (or losses) in the account. Supplying this information to the 529 plan is critical. If the plan does not receive this breakdown between basis and gain/(loss), it will account the transfer as consisting entirely of earnings which are subject to income tax and a 10% additional tax if later withdrawn as a non-qualifying withdrawal from the 529 plan.

Thank you, but the 1099 Q shows a distribution from each...

Shanny772 — Thu, 06 Jun 2019 05:31:52 GMT

Thank you, but the 1099 Q shows a distribution from each of his mutual funds accounts under the Coverdell ESA because we had to take the distribution in order to get the funds deposited into the 529 acccount. When we received the checks, we took them directly to Edward Jones and had them deposited into his 529 Account. Turbo tax asks if it was rolled into a Coverdell within 60 days. It wasn't a Coverdell account, the full funds were deposited into his new 529. He's 14 so we haven't used any funds for his college yet. We just wanted all of our boys to have 529 plans so we moved our oldest sons's fund last January.

I realize that if it's used for qualified education expen...

Shanny772 — Thu, 06 Jun 2019 05:31:54 GMT

I realize that if it's used for qualified education expenses that it's non-taxable. But, we didn't use the funds for anything, just put them in the 529 account we set up for him. However, how do I enter the 1099 Q on turbo tax? Or, do I just not report the 1099 Q and keep it with my records showing where the funds were distributed. I have all of that paperwork, just wasn't sure how to enter the 1099 Q or if I just don't report it at all...

thanks - give me a moment

ToddL — Thu, 06 Jun 2019 05:31:55 GMT

thanks - give me a moment

Sorry for the long answer but this requires a workaround...

ToddL — Thu, 06 Jun 2019 05:31:57 GMT

Sorry for the long answer but this requires a workaround and I had to check several sources to make sure it was the right way to do it.

That's okay. I appreciate you checking on it for me. I've...

Shanny772 — Thu, 06 Jun 2019 05:31:58 GMT

That's okay. I appreciate you checking on it for me. I've spent a lot of time researching it on my own too. But what do I need to do?

Sorry, it was buried at the end (sometimes better with wo...

ToddL — Thu, 06 Jun 2019 05:32:00 GMT

Sorry, it was buried at the end (sometimes better with workarounds - When it asks "Did you roll over or transfer all or part of this distribution within 60 days to another Coverdell ESA?", answer "Yes".

The end result is legitimate, but you can't get to the "q...

ToddL — Thu, 06 Jun 2019 05:32:02 GMT

The end result is legitimate, but you can't get to the "qualified expenses" screen until the beneficiary is a college student.

Even though we didn't rollover to an ESA...but a 529?

Shanny772 — Thu, 06 Jun 2019 05:32:02 GMT

Even though we didn't rollover to an ESA...but a 529?

And I report this on my tax return, correct? I do not rep...

Shanny772 — Thu, 06 Jun 2019 05:32:04 GMT

And I report this on my tax return, correct? I do not report it on a return for my son, correct?

Yes, even though you didn't rollover to a Coverdell, the...

ToddL — Thu, 06 Jun 2019 05:32:04 GMT

Yes, even though you didn't rollover to a Coverdell, the effect on your return is the same.
As far as whose return is involved, the 1099-Q is reported on whoever's return has the SSN listed on the Form 1099-Q.

Re: This is a bit complicated, but unavoidably so. You ca...

Anonymous — Fri, 18 Mar 2022 19:04:34 GMT

This is still an issue - I just spent 90min with TurboTax product experts and tax experts in chat, and they didn't seem to be able to fix this.

Why hasn't this been fixed since 2019?

We did a rollover from Coverdell ESA -> 529 that is not recognized on the 1099-Q because it was not a trustee to trustee transfer. We did not have the option to do a trustee to trustee transfer because our 529 institution doesn't support them, but we were required to provide basis/gains information along with an account transcript.

Turbotax only asks if you rolled it over to a new Coverdell ESA, but we didn't do that. I answered "Yes" based on this thread, but the "tax expert" we spoke to didn't seem to understand my situation in the chat.

Please fix this so others aren't confused. We would have paid a considerable amount to the federal government if this were taxed.

Re: And I report this on my tax return, correct? I do not rep...

FangxiaL — Sat, 19 Mar 2022 03:48:28 GMT

If you rolled over the money from Coverdell account to 529 plan, it is not a taxable event. You don't need to enter the 1099-Q form on your return. If the IRS ever asks about it, a simple reply can resolve the issue. The worst case would be for you to provide the documents to the IRS that you deposited the funds into a 529 plan.

@Shanny772

Re: And I report this on my tax return, correct? I do not rep...

Anonymous — Sat, 19 Mar 2022 19:41:09 GMT

Can this be added to the software? It would seem a simple option to select that it was rolled over would prevent any confusion.

Re: This is a bit complicated, but unavoidably so. You ca...

AllenCar1 — Mon, 18 Apr 2022 14:52:22 GMT

ToddL your answer is 100% correct and thank you; but you need to add one more step to Make Everyone "Comfortable" with Answering "Yes" to the Step-by-Step Interview question: "Did you roll over or transfer all or part of this distribution within 60 days to another Coverdell ESA?"

The issue is that the Interview question does not reflect the actual words on the Worksheets.

On TurboTax Premier CD/Download version you need to use the FORMS View; then open the Form 1099-Q and 1099Q Summary.

Answering YES in the Interview fills in the Worksheets as follows:
On page 2 Question #1 Rollovers of the 1099-Q worksheet, the word Coverdell is not printed; only QTP (Qualified Tuition Plan). A 529 is a QTP.

Rollovers, Transfers and Amounts Recontributed
1 Was the distribution rolled over and the following conditions met?
* Rolled over within 60 days of the distribution
* 12 months since a previous rollover (to the same beneficiary for a QTP). See Help
a Yes, entire distribution was rolled over meeting above conditions X

Then on the 1099Q Summary the the word Coverdell is not used. Only ESA (Education Saving Account) is used. A 529 is a ESA. The following is printed:

Coverdell Educational Savings Account (ESA) Distributions
1 Total gross distributions from box 1 of Form 1099-Q        (Dist. Value)
a Less: Rollover to another ESA of beneficiary            (Amount Rolled Over)
2 Balance of gross Coverdell ESA distributions            (Zero)

What is filled out on the Worksheets accurately represents the complete Coverdell "transfer" to the 529 which as ToddL stated is "A contribution to a 529 plan is considered a qualified education expense," So technically it is NOT a Rollover but is does the same thing. I feel Comfortable with the way the Worksheets are completed.