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Subject:  Educ. IRAs - some basic questions Date:  12/16/1998  6:15 PM
Author:  Wavelength Number:  7268 of 127637

<Note: I posted this on the Paying for College board yesterday, but it got no response, so I figured I'd try here.>

I have a few basic questions about educational IRAs, and have seen some posts that seem to contradict some of what I understood to be true when I set these accounts up for my children

1) The accounts that I set up ended up being titled in my name with my children listed as beneficiaries. They are not custodial accounts. I assume this means that I have total control over the money now, and also in the future, even after my children turn 18. I don't want my kids able to say, "Heck, I've decided I don't want to go to college, I'll pay the taxes and penalties since this is free money anyway." In addition, I want to be the one to decide if and when the account gets rolled over to a sibling if the child does not enter college or if the funds aren't totally used up by the time they graduate. Can anyone confirm with authority that these two assuptions on my part are indeed correct?

2) As I stated, I have set up accounts for each of my kids (ages 1, 7, 10, and 12). Will I be able to roll over any unused amounts from one child to the next, even though they already have Ed IRA accounts established in their names and I've been contributing the maximum amount each year? It seems to me that should one find some other way to fund the other children's education (or God forbid they opt out of college), then this could be used by parents of multiple children to essentially multiply the amount available to put away tax free earnings for the last child. Also, the effective length of time to contribute to an education IRA can be increased significantly beyond 18 years. If I contribute to my 1 year old's Ed IRA, and end up having another child 10 years from now, I could end up contributing 18 years to the future child, plus roll over my current child's Ed IRA to him/her, giving me an effective 28 years of contributions and tax free accumulation for my future child (ie I get the multiple contribution amount for the time both children are under 18, PLUS I get to stretch out the effective time for tax free compounding). All assuming I find some other way of paying for the first few children's college expenses, of course. Seems like a good deal, and lots of cash could end up in the account of the last child.

The reason I'm thinking this way, is that The HOPE and Lifetime education tax credits are exclusive to Ed IRA disbursements, so I may find it advantageous to find a way to use these tax credits for the early children, and hopefully shove enough cash over to the last kid's account to be able to truly pay for all college expenses (little hope of doing this with just $500/year contributions) in a tax free manner.

3)Directly related to question 1), who's money is it really? Should some money be left over, the child reaches age 30, or doesn't go to college, taxes will be due and a 10% penalty paid (am I correct in assuming taxes will be due only on the amount of earnings over and above whatever was used for ed. expenses [ie if the amount left over is less than or equal to my original - non-deductable - contributions, no tax is owed], but the penalty must be paid on the entire final disbursement amount, including my contributions?) Do I receive the disbursement and pay the tax/penalties, or the beneficiary? Seems to me it would still be my money, or else it would be a gift to the child, and a way of getting around the $10k/year gift limitation.


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