Coverdell education savings accounts, formerly referred to as education IRAs, help families save for future schooling costs by offering tax-sheltered growth. While deposits made into the account aren't tax deductible, you won't have to pay tax on the interest the money earns. You can withdraw the money in the account tax-free, as well, so long as you use the funds to pay for qualified education expenses. Qualified expenses include costs associated with college, high school and grade school. If for some reason your child chooses not to use the money in his Coverdell account, you can transfer it to another family member who is under the age of 30.
TL;DR (Too Long; Didn't Read)
An education IRA can be transferred from one child to another.
You can't switch the beneficiary of the Coverdell to just any child. The student has to be a member of your family. Fortunately, the rules about who qualifies as a family member are fairly generous. Obviously, your biological children, adopted children and stepchildren qualify as family members, as do your siblings. Coverdell rules also count your first cousins, nieces, nephews and in-laws all as family members eligible to receive Coverdell transfers from you. You can also transfer these funds to your spouse. So long as you transfer the funds to a qualified individual, you can do so without tax consequences. If you finish up graduate school and, by some miracle, have money left in your Coverdell account, you can transfer your remaining funds to any of these people.
When transferring a Coverdell, the funds must go to someone under the age of 30. While this age limit probably won't create problems if you wish to transfer the money to your children, it might limit your ability to transfer your funds elsewhere. If you're done but your brother is still finishing up med school at age 31, you can't transfer your remaining funds to him.
The Transfer Process
Banks hold most Coverdell savings accounts, but the IRS has authorized some other institutions, such as investment firms, to offer them. To change the beneficiary on your Coverdell account, simply file a transfer form with your bank or the entity that holds your account. The form requires the account information for the existing Coverdell, your information, the information for the new beneficiary and how you want the money invested in the new account. Once you submit the form, the bank does the rest.
If the new beneficiary already has an existing Coverdell or wishes to open a new account at a different bank, you'll need to complete a rollover. To do so, take a distribution from your Coverdell account and then deposit it into the new beneficiary's account within 60 days. There's no tax consequences, or even tax reporting, as long as you complete the rollover on time. You are, however, limited to just one rollover during any 12-month period.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."