Coverdell ESA - Can Minor open own account?

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Chitown13
Posts: 1
Joined: Thu Jun 06, 2013 8:58 pm

Coverdell ESA - Can Minor open own account?

Post by Chitown13 »

As a Vanguard investor, I've followed this forum with interest for some time, but this is my first post.

My wife and I had our first child recently and I am trying to do the most tax-planning I can for our family.

For the past several years, we have maxed out our 401(k)'s, Backdoor Roth IRA's, 529 plan's (up to $10,000 per person in Illinois for state income tax break), HSA, and after that we do some taxable investing. We will continue to do this for the foreseeable future.

Both of us attended private high school and we'd like to send our child to a private high school as well. With that in mind, I think a Coverdell ESA can be a useful device now that it has been made permanent (15 years of maximum $2,000 contributions could add up to a nice chunk of change for high school payments). However, our income prohibits us from contributing to an ESA directly (income limits for contributing to these accounts).

I believe that I can do the following to get around the income limits:

1. set up a custodial account for my child,
2. gift $2,000 to the account, making the funds the child's property,
3. As custodian of the child's account, have the child contribute to the Child's own ESA.

I would normally do all investing at Vanguard and go to one of its helpful reps with this question, but Vanguard doesn't permit new ESA accounts to my knowledge. Today, I proposed my plan at a Scottrade office (I already have a small account there) to blank stares and then the auto-response that I couldn't do this. I had already prepared myself somewhat for this response, but after about an hour I gave up on trying to get a reason for their negative response.

Has anyone done this? If so, is there a better company that could support or is more familiar with this investment plan? I'm considering just opening the ESA with my child's social as the donor and me as the custodian.

Thanks for any help.
nobility
Posts: 72
Joined: Sat Jan 30, 2010 6:00 pm

Re: Coverdell ESA - Can Minor open own account?

Post by nobility »

Re-raising this thread to see if anyone has answers as I'm currently in the same situation and looking to bypass the income-restrictions for Coverdell ESA.
deeppizza
Posts: 59
Joined: Wed Mar 16, 2016 11:16 pm

Re: Coverdell ESA - Can Minor open own account?

Post by deeppizza »

You are correct that Vanguard and Fidelity don't offer ESAs anymore. I opened up an ESA for both of my children (they're the owners, and I act as the guardian), one through Primecap and the other with Mairs & Powers. Although they are actively managed fund houses, I think they are sound places to hold an ESA. Schwab also allows ESAs, and you have access to any/all funds they allow (no commission on theirs).
nobility
Posts: 72
Joined: Sat Jan 30, 2010 6:00 pm

Re: Coverdell ESA - Can Minor open own account?

Post by nobility »

My understanding is that to bypass the income limit to contribute to the Coverdell ESA, I can transfer the money to my child and have the child contribute. Does this require me to open up a UTMA account at Vanguard first? I would then contribute 2k to the UTMA and then withdraw from there and contribute to the Schwab-ESA?

Also, if I did a $100k superfunding of a 529 for the child last year, I assume I can still contribute $2k for last year since the gift tax exclusion hasn't been exceeded for the child (100k/5yrs = 20k towards gift tax exclusion).
deeppizza
Posts: 59
Joined: Wed Mar 16, 2016 11:16 pm

Re: Coverdell ESA - Can Minor open own account?

Post by deeppizza »

You don't have to open a UTMA to fund the ESA with your child as the owner. You can just contribute the $2K directly to the ESA, but it will be counted against your annual gift tax exclusion limit.
avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Coverdell ESA - Can Minor open own account?

Post by avalpert »

nobility wrote:My understanding is that to bypass the income limit to contribute to the Coverdell ESA, I can transfer the money to my child and have the child contribute. Does this require me to open up a UTMA account at Vanguard first? I would then contribute 2k to the UTMA and then withdraw from there and contribute to the Schwab-ESA?

Also, if I did a $100k superfunding of a 529 for the child last year, I assume I can still contribute $2k for last year since the gift tax exclusion hasn't been exceeded for the child (100k/5yrs = 20k towards gift tax exclusion).
This is what I do - both the UTMA and ESA are at TD Ameritrade.
motorcyclesarecool
Posts: 956
Joined: Sun Dec 14, 2014 6:39 am

"Backdoor" Coverdell ESA?

Post by motorcyclesarecool »

I was researching options for my kids' Coverdell ESAs, and came across the following throwaway line in a US News & World Report article: https://money.usnews.com/investing/arti ... gs-account
US News wrote:However, people with incomes that are too high can give the cash to the child or other individual who meets the income test, and then have it directed to the account.
Does anybody know anything about this? Would this be as simple as depositing to an UTMA, then transferring from there to the ESA? This seems "too good to be true."
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.
motorcyclesarecool
Posts: 956
Joined: Sun Dec 14, 2014 6:39 am

Re: Coverdell ESA - Can Minor open own account?

Post by motorcyclesarecool »

Does this successfully overcome the income limitation? Is there an IRS publication allowing for this that you're aware of?
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.
WorkToLive
Posts: 729
Joined: Thu Nov 12, 2009 1:19 pm

Re: Coverdell ESA - Can Minor open own account?

Post by WorkToLive »

This page says Pub 270 specifically allows child to make contributions.

"One way is to have the child make the contribution. Nothing in the law prohibits this, and the IRS explicitly says, in Publication 970, that this is possible."

http://fairmark.com/college/saving/cove ... ontrib.htm

Pub 270 reads, "Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits) for the year is less than $110,000."

https://www.irs.gov/pub/irs-pdf/p970.pdf
motorcyclesarecool
Posts: 956
Joined: Sun Dec 14, 2014 6:39 am

Re: Coverdell ESA - Can Minor open own account?

Post by motorcyclesarecool »

WorkToLive wrote: Mon Oct 09, 2017 7:44 am This page says Pub 270 specifically allows child to make contributions.

"One way is to have the child make the contribution. Nothing in the law prohibits this, and the IRS explicitly says, in Publication 970, that this is possible."

http://fairmark.com/college/saving/cove ... ontrib.htm

Pub 270 reads, "Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits) for the year is less than $110,000."

https://www.irs.gov/pub/irs-pdf/p970.pdf
:sharebeer
Excellent. Could I transfer from an UTMA at a bank to TD Ameritrade directly?
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.
motorcyclesarecool
Posts: 956
Joined: Sun Dec 14, 2014 6:39 am

Re: Coverdell ESA - Can Minor open own account?

Post by motorcyclesarecool »

Now that TDA is messing with their commission-free ETFs, and Vanguard still won't accept a new or transferred Coverdell ESA, does anyone have any favorite trustee at this time?
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.
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