Backdoor Coverdell

[itoh]

Ps I originally posted this in budgeting forum but realize maybe this is  more appropriate here. Sorry for the repeat.

 

 

 

Anyone knows if I need to open a UTMA or Kids savings account first then contribute from there to coverdell account to create a paper trail that the money is kids money ?

We are over the income limit and already have 529 but would like to open coverdell as well to help with high school expense.

I did i make a big miskake contributing directly to coverdell which is opened in my kid’s name.

Reading through i realize since i although by intent ‘gift’ the cash to my kids but since the money comes out from my account, i cannot prove it that the cash is owned by the kid.

Please help.

Thanks

Irene

[jfoxcpacfp]

If I were your CPA, I would treat a one-time gift as an indirect gift from you to the child. This is not so uncommon. In the future, consider transferring the $ to an UGMA/UTMA account in the child's name and then on to the Coverdell.

I have deleted your 1st post.

[itoh]

Johanna,

if i buy ESA using the money from UTMA/UGMA account, I suppose I will have to pay tax on the gains first before withdrawing the money right ?

Can I use Kids Savings account to buy ESA instead ?

 

Thanks

[jfoxcpacfp]

itoh wrote:

Johanna,

if i buy ESA using the money from UTMA/UGMA account, I suppose I will have to pay tax on the gains first before withdrawing the money right ?

Can I use Kids Savings account to buy ESA instead ?

Click to expand...

An UGMA/UTMA is a savings account for children. This is not a tax-deferred account. Using money from any account in your children's names will have no effect on taxes, which are reported on your children's tax returns if high enough.