Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Our MAGI is above the $220k mark, but my understanding is that others can contribute to my children's ESAs.

I already have an account I opened 4-5 years ago, which I contributed for 2 years before our income became too high.

Can I can gift $4k to my sister (<MAGI requirements) for her birthday, then link her bank account to these 2 ESA accounts and withdraw $2k into each of them? Or is there a better strategy?

--
whyohwhyoh
Print the post Back To Top
No. of Recommendations: 1
Can I can gift $4k to my sister(<MAGI requirements)

Sure. For that matter, you can give me $4,000.

for her birthday, then link her bank account to these 2 ESA accounts and withdraw $2k into each of them?

One hates to use blunt words, but in my day that was called theft. Once you give money to anyone it's not yours to control any longer.

It's never a good idea to try to game the system. Take a look at Chapter 8 of Pub 970, which covers 529 plans. There's no income restriction there. A while ago we discussed here how you could move money from an ESA to a 529.

If someone who meets the income limit for ESA contributions wants to make one to one of the accounts in question there's no prohibition on that.

Phil
Rule Your Retirement Home Fool
Print the post Back To Top
No. of Recommendations: 0
It's never a good idea to try to game the system.

Interesting. What about putting money into a non-deductible Traditional IRA then immediately converting into a Roth IRA to get around max income Roth IRA limits.

Would you consider that gaming the system, or tax avoidance strategy, or?

And of course it wouldn't be theft. It would be with my sister's blessing.

--
whyohwhyoh
Print the post Back To Top
No. of Recommendations: 0
Interesting. What about putting money into a non-deductible Traditional IRA then immediately converting into a Roth IRA to get around max income Roth IRA limits.

Would you consider that gaming the system, or tax avoidance strategy, or?


I call it making use of a loophole which Congress could easily close, which is perfectly legal and requires no conspiracy.

And of course it wouldn't be theft. It would be with my sister's blessing.

Oh, my bad. See conspiracy above, now that you've dragged your sister into it.

Phil
Rule Your Retirement Home Fool
Print the post Back To Top
No. of Recommendations: 0
What about putting money into a non-deductible Traditional IRA

Be careful and look at all the implications of this.
Print the post Back To Top
No. of Recommendations: 0
Be careful and look at all the implications of this.

As long as there are no other Traditional IRA accounts, all is clear correct?

--
whyohwhyoh
Print the post Back To Top
No. of Recommendations: 0
I call it making use of a loophole which Congress could easily close, which is perfectly legal and requires no conspiracy.


Congress could just as easily close this loophole, by stating that if parents of the child MAGI is over $220k then no contributions can be made at all.

--
whyohwhyoh
Print the post Back To Top
No. of Recommendations: 0
Oh, my bad. See conspiracy above, now that you've dragged your sister into it.

Or maybe not:
Sister: "I'd love to give $5K to your kids for college."
Sister: "But I just don't have that kind of money."
Why: "Well, I don't have $5K, but I do have $4K."
Why: "and I have an ESA already setup that you can put it into if you want."
Sister: "That would be great."

Now if that's what happens, it isn't theft.
And I don't think it's even conspiracy - it's a real gift to the sister - who happens to want to use it for Why's kids.

The problem is what was the intent when the money changed hands...
Why's post didn't provide enough background to make anyone think it's anything other than a sham. And so you came to the conclusion that it was. (and if there were ever some from the IRS looking at it, they would probably come to the same conclusion.)
Print the post Back To Top
No. of Recommendations: 1
Congress could just as easily close this loophole, by stating that if parents of the child MAGI is over $220k then no contributions can be made at all.

What loophole? In the case of ESA contributions the law prohibits contributions for persons with income exceeding a certain level. Period. Trying to make it look like someone else is making the contribution doesn't change the basic fact that it's being made by someone who legally can't do so. No matter how you slice it, even if your sister wrote the contribution checks in the scenario you describe it would still be you making the contribution, with your sister acting as your agent. They didn't get Eliot Spitzer for being a john. They got him via money laundering laws because of the way he was trying to hide the payments. Which is why I said and continue to say that it's never a good idea to try to game the system.

As to Roth IRAs, the law prohibits contributions from persons with income exceeding a certain level. Period. The law does not prohibit conversions at any income level or using any filing status. (Before 2010 it did prohibit conversions by those with AGI over $100,000, as well as prohibiting conversions by people filing Married, Filing Separately at any income level.) Some people with too much income to make Roth contributions can exploit this difference and make what we call "back door" contributions without tax consequence. That's what we usually call a loophole, which Congress could easily close by reinstating the income limit for conversions. If you can't see the difference I can't help you since I can't think of a better way to put it.

I seem to have put you off with the use of provocative language such as "theft" and "conspiracy." I use such in the same manner as the farmer uses the board in the old saw about a 2x4 and a mule and see no need to change. I'll again suggest you take a look at 529's. They may not fit your needs, but they do have much more liberal contribution rules, and some states even give you a break on state income tax. But don't get me wrong. It's impossible to underestimate how much I care what you and your sister, if she chooses to participate, do.

Phil
Rule Your Retirement Home Fool
Print the post Back To Top
No. of Recommendations: 0
If you can't see the difference I can't help you since I can't think of a better way to put it.

Let's just say taxes are confusing....

IRS says I can gift someone up to $14k tax free, but doesn't say I can't attach requests to the giftee. At least I haven't found this in the pubs.

--
whyohwhyoh
Print the post Back To Top
No. of Recommendations: 0
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Em...

Wouldn't you be receiving full consideration in return ?
Print the post Back To Top
No. of Recommendations: 3
doesn't say I can't attach requests to the giftee.
I think it does...
Because when you make a requirement of providing the money that your sister put it into your kids account, it *isn't* a gift.

And that kind of statement makes it obvious that your sister is acting on your behalf - not doing it of her own volition.
Print the post Back To Top
No. of Recommendations: 0
Guess that's why I'm not a tax adviser....


I'm going to do this backdoor Roth scheme, but pass on the Coverdell, not much money in it anyway for the trouble. Only $2k/year.

--
whyohwhyoh
Print the post Back To Top
No. of Recommendations: 2
My husband's boss about 30 years ago did something similar--he gave control of his company to his father; father received profits and paid taxes at his rate (substantially lower than boss); father gave boss the net. Boss spent some time in jail courtesy of the IRS.

Put the money in a 529 fund.

Kathleen
Print the post Back To Top