Can you rollover Coverdell ESA funds to Roth IRA under Secure 2.0 Act?

This is a great question about a somewhat confusing part of the Secure 2.0 Act. Unfortunately, the direct rollover provision from education accounts to Roth IRAs specifically only applies to 529 plans, not Coverdell ESAs. The legislation was written to target 529 plans specifically. Your two-step process idea is actually the correct approach in this situation. You would first need to roll the Coverdell ESA into a 529 plan (which is permitted without penalties), and then you could utilize the 529-to-Roth rollover provision. However, you're right about the 15-year concern. The Secure 2.0 Act stipulates that the 529 account must have been open for at least 15 years before funds can be rolled into a Roth IRA. This is designed to prevent people from using this as a short-term backdoor Roth contribution method. So if you create a new 529 with the Coverdell funds, you would indeed need to wait 15 years before executing the Roth conversion.

After struggling with this exact situation (had Coverdell ESAs for both kids that didn't get fully used), I found an amazing tool that helped me navigate all the conversion options and tax implications. I used https://taxr.ai to analyze my specific situation with both the Coverdell and some 529 funds. Their system actually showed me that in my case, it made more sense to use the Coverdell funds for some qualifying education expenses I hadn't considered (my daughter's laptop and internet for her online classes) before doing any conversions. This saved me from making a costly mistake since those expenses were about to expire timewise. For the remaining funds, it mapped out the exact timeline and tax implications of the Coverdell-to-529-to-Roth path, including how the 15-year waiting period would affect my overall retirement planning strategy.

Just wanted to update everyone - I decided to try https://taxr.ai after my skeptical questions. Honestly, I'm blown away by how helpful it was for my specific situation. It turns out there was a detail about my existing 529 plan that I totally missed! I had actually set up a 529 for my son back in 2009 and then stopped contributing after opening the Coverdell in 2012. I completely forgot about this dormant account. The taxr.ai analysis flagged this and showed me that I could roll the Coverdell funds into THIS existing 529 which has already satisfied the 15-year requirement! This means I can actually start the Roth IRA conversions for him next year without waiting. The system also calculated exactly how much we can convert each year based on his part-time job income. This saved us literally years of waiting and thousands in potential tax benefits. Sometimes being a packrat with old accounts pays off!

If you're dealing with this Coverdell-to-529-to-Roth conversion situation, you might also run into issues trying to get clarification from the IRS. I spent WEEKS trying to get through to someone who could answer my specific questions about how the beneficiary income requirements work for these conversions. After getting nowhere with the regular IRS phone line (literally 2+ hour wait times then disconnected), I found a service called Claimyr at https://claimyr.com that got me a callback from the IRS in under 15 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c I was finally able to speak with a specialist who confirmed that for the annual conversions, my daughter needs to have earned income in each tax year we do a conversion, not just when we initially set up the Roth. This was crucial information for our planning since she's still in college with variable income.

I need to eat some humble pie here. After calling Claimyr a scam yesterday, I decided to try it this morning since I've been trying to reach the IRS for THREE WEEKS about my 529 plan conversion options. I'm shocked to report it actually worked. I got a callback from the IRS in about 20 minutes, and spoke with an agent who walked me through exactly how the rollover reporting works on tax forms. The agent confirmed something important for anyone considering the Coverdell-to-529-to-Roth path: when you roll Coverdell funds to a 529, the original contribution dates from the Coverdell do NOT carry over. However, they did tell me that some financial institutions may have been incorrectly reporting this, so it's worth documenting everything carefully in case you need to challenge an incorrect determination later. So while I'm still mad about the 15-year waiting period, at least I now understand exactly how to document everything properly. Sorry for being so skeptical!

One thing nobody has mentioned yet is that you should check if your STATE has any special rules about these rollovers! I live in Nebraska and our state department of revenue has different guidance than the federal rules. In my state, if you received state tax deductions for 529 contributions (which I did), rolling those funds into a Roth IRA could trigger a state "recapture tax" where they claw back the deductions you received. So even if the federal rules allow the rollover without penalties, your state might still hit you with taxes. I'd check your state's tax authority website or call them directly before making any moves.

Has anybody actually completed one of these rollovers yet? My financial advisor is telling me the custodians (Fidelity in my case) aren't set up to process these transactions yet even though the law allows it.

This is such a helpful thread! I'm dealing with a similar situation with my son's Coverdell ESA. One additional consideration I discovered is the timing of when you do the Coverdell-to-529 rollover within the tax year. My tax preparer pointed out that if you roll the Coverdell funds to a 529 late in the year, you might miss the window to use any of those funds for qualified education expenses in that same tax year (if your beneficiary is still in school). This could be relevant if you're trying to maximize the educational use of the funds before eventually converting to Roth. Also, for anyone considering this path, make sure to keep detailed records of the original Coverdell contribution dates and amounts. Even though they don't carry over to the 529 for the 15-year rule, you'll want this documentation for your own tax planning and to verify any calculations your financial institution makes. The complexity of these rules really makes me appreciate having professional guidance, whether that's through tax software, advisors, or the various services people have mentioned here!

Thank you all for this incredibly detailed discussion! As someone who's been wrestling with a similar Coverdell ESA situation, this thread has been a goldmine of information. I wanted to add one more consideration that my CPA brought up - the impact of Required Minimum Distributions (RMDs) on this strategy. Since Roth IRAs don't have RMDs during the owner's lifetime, converting unused education funds to a Roth can be a great long-term estate planning tool. However, if you're planning this conversion for a young beneficiary, you need to factor in that they'll eventually have RMDs from any traditional retirement accounts they accumulate. The timing of when to do these conversions (once the 15-year period is satisfied) might be strategic - doing them during years when the beneficiary has lower income could minimize the tax impact, since the conversions count as taxable income. Also, I noticed several people mentioned state tax implications. Don't forget that some states don't tax Roth IRA distributions at all, while others do. So the long-term state tax treatment of the converted funds could be another factor in deciding whether this strategy makes sense for your situation. The complexity of all these rules really reinforces why getting professional guidance is so valuable for these decisions!