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My son is, naturally, claimed as a dependent on my tax returns. My question is:

Can my sister open a Coverdell Education Savings Account (an education IRA) for my son (her nephew)?

I am aware that this presents no tax benefit at the time of contribution, but given that the growth and distribution will be tax-free, it may prove to be a viable option. I'm just not sure if a non-legal guardian can open an account and contribute to it periodically...

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She can open a 529 though? Is there a specific reason for a coverdell? Coverdells are much more limited compared to a 529 –  MrChrister Nov 28 '12 at 16:43
    
I have already max'ed out the 529 contribution... –  rs79 Nov 29 '12 at 13:35
    
The maximum 529 deposit this year is $65000. You can gift $13,000 to child in any year, but for a 529, may gift up to five years at once. A form 709, I believe, is required, but no tax due. Your spouse can do the same. The $2000 Coverdell offers no such flexibility, and is a tiny fraction of the deposits the 529 permits. Note - the $65000 lump sum means no further deposits from you for the next 4 years. –  JoeTaxpayer Nov 29 '12 at 17:02
    
Not sure if this is a separate question - but can a 529 be used for a private school? Or can it only be earmarked for higher education? –  rs79 Nov 29 '12 at 18:44
    
529 is higher education only. Coverdell can be used for private lower education. From your tax-deduction question, you seemed to believe the 529 limit was far lower than it is. What, exactly, is your goal? We seem to be dancing around the issue. –  JoeTaxpayer Nov 29 '12 at 20:16

1 Answer 1

up vote 4 down vote accepted

Yes, in fact, if your MAGI is $220K or over as a couple, you are not able to open the account. Having a relative with lower income is a good way to set one up.

As MrChrister commented, the Coverdell is more limited, only $2000/yr, dropping to $500 if congress doesn't act. (limit was $2000 in 2012, to clarify) Funds must be disbursed by age 30 to the beneficiary. But - the investment options are as varied as any other investment accounts, with a 529, the choices for investment are quite limited. In a 529, unused funds can be used for a changed beneficiary within the same extended family, not so with Coverdell.

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IRS Pub 970 confirms this. Any person including the beneficiary with AGI less than $110K ($220K for joint) can contribute. –  amit_g Nov 28 '12 at 18:13
    
@amit_g - Thanks for the support! IRS pubs are the best references to these factual questions. –  JoeTaxpayer Nov 28 '12 at 21:07

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