I contributed $500 to my son's Edu-IRA for year 2000. We just realized a capital gain in March which would put us over the $160000 AGI limit, assuming that we are luck enough to avoid significant capital loss later of the year. So I might have to withdraw the $500 and its earnings before April 15, 2001 from my son's Edu-IRA account.

My son is only three years old and does not need to file a return. Do I have to include the earnings of the $500 as our income on our joint return and pay capital gain tax on it or I don't have to report it at all? This is question #1.

Question #2: my son's grandparents have expressed interest in contributing to his Edu-IRA previously and their income is below the AGI limit. Are they allowed to contribute $500 to my son's Edu-IRA even though we could not to? If so, do they have to contribute to a seperate Edu-IRA account of his?

In practice, I could have given the grandparents $500 and ask them to contribute instead of me. Is this legal?

Thanks
HZM

<< I contributed $500 to my son's Edu-IRA for year 2000. We just realized a capital gain in March which would put us over the $160000 AGI limit, assuming that we are luck enough to avoid significant capital loss later of the year. So I might have to withdraw the $500 and its earnings before April 15, 2001 from my son's Edu-IRA account. >>

I suggest you get it out now if you want to be sure that there's a year 2000 contribution. Ed IRA contributions must be made by 12/31, so there's no time to "fix" the contribution after the end of the year. See more below.

<< My son is only three years old and does not need to file a return. Do I have to include the earnings of the $500 as our income on our joint return and pay capital gain tax on it or I don't have to report it at all? This is question #1. >>

It doesn't go on your return. If your son has no filing requirement, it doesn't get reported.

<< Question #2: my son's grandparents have expressed interest in contributing to his Edu-IRA previously and their income is below the AGI limit. Are they allowed to contribute $500 to my son's Edu-IRA even though we could not to? >>

Yes.

<< If so, do they have to contribute to a seperate Edu-IRA account of his? >>

As opposed to? If you mean do their contributions have to go into an account other than one that you've previously made contributions to, the answer is "no."

<< In practice, I could have given the grandparents $500 and ask them to contribute instead of me. Is this legal? >>

It's legal for you to give the grandaparents (or your son) $500. It's legal to ask anyone to contribute to your son's Ed IRA. It's not legal for you to give the money to someone for the expressed purpose of making a contribution that you couldn't make on your own. Get the point? Yes, it's a gaping loophole that no one seems eager to plug.

TMF ExRO
Phil Marti

Hi, Phil, thanks for your reply. I will get the money out now per your suggestions.

All is clear except when you say: "It's legal to ask anyone to contribute to your son's Ed IRA." Does this "anyone" include a Aunt, Uncle, or a friend? Does this "anyone" has to have earned income? In Pub590 there are no rules as to whom this "anyone" should be at all except the AGI limit.

May I set up a costodian account for my son and put in certain amount for him each year (below $10000 to avoid gift tax) as a gift, then withdraw $500 from this account to contribute to his Edu-IRA?

Thanks so much for your help and your patience.

HZM

<< All is clear except when you say: "It's legal to ask anyone to contribute to your son's Ed IRA." Does this "anyone" include a Aunt, Uncle, or a friend? Does this "anyone" has to have earned income? In Pub590 there are no rules as to whom this "anyone" should be at all except the AGI limit. >>

Correct. Now what was the name of "The Millionaire"? (Yes, I know I'm dating myself.)

<< May I set up a costodian account for my son and put in certain amount for him each year (below $10000 to avoid gift tax) as a gift, then withdraw $500 from this account to contribute to his Edu-IRA? >>

Sounds like a plan to me. Also sounds like you were listening well. (I hasten to add that I'm not an expert in custodial accounts, but from what I know about them this would be fine. It's fine from a tax standpoint, but double check the property law end of it before you set it up.)

TMF ExRO
Phil Marti