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[[An October Motley Fool article said, regarding Education IRAs: "there is no reason that Grandpa
can't give a $500 gift to little Johnny. Johnny can then turn around and open his OWN education
IRA account for the full $500, since Johnny is well under the income limitations."]]

That's right. I wrote those words, and continue to stand behind 'em.

[[ Maybe I'm too
conservative, but this seems like tax fraud to me.]]

Where is the fraud? Grampa will be the custodian of the account...or even Johnny's parents can be custodians based upon the Education IRA that Johnny decides to open. It's still Johnny's money.

[[ Isn't the contribution really coming from Grandpa
(who is over the income limits, in the example)? Why couldn't everyone who exceeds the income
limits just get around them by giving their little Johnny $500 and then Johnny ostensibly makes the
Education IRA contribution?]]

As the law is currently written, at least in my opinion, they can. I didn't write the law, I just read it an apply the rules.

Could the IRS come in and say that this would be a "substance vs. form" issue. Possibly. But I believe that they would be on shaky ground. There is no law that currently prohibits a true, qualified gift to another person. And that person (the person receiving the gift) can do whatever they want to with the funds. That is the theory behind a gift.

So until the IRS writes regulations that prohibits such currently legal transactions, I see no reason NOT to use the law to it's maximum advantage.

We did the same thing with Roth IRA conversions and "un-conversions" and "re-conversions" in order to save substantial tax dollars by just moving some stocks around. This "move" was clearly not in keeping with the spirit of the law...but was technicallly acceptible as the law was written. It wasn't until the regulations came out to clarify the issue that we had real, live instructions on which to rely.

So "fraud" may be a little strong in this case.

Hope this helps...
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