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."
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the transfer as consisting entirely of earnings which are subject to income tax and a 10% additional tax if later withdrawn as a non-qualifying withdrawal from the 529 plan.
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.
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.
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.
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