PRINT
EMAIL
COMMENT
BUZZ UP
DIGG THIS
By Amy Esbenshade Hebert
Maya Lebedinsky's piggy bank has seen a lot of action lately. The bank, a gift from her grandmother, came stuffed with a $5 bill shortly after Maya was born. Three years later, that bill has plenty of company.
RELATED LINKS | |||
 |
Rankings: 100 Best Public Colleges | ||
|
|
Best Ways to Pay for College | ||
|
|
Everything You Need to Know About College Aid | ||
|
|
MORE COLLEGE AND FAMILY ADVICE | ||
Maya's parents, Cameron and Alex, of Bowling Green, Ky., are adding money regularly as they start to teach their daughter to save. "Right now, it's a bit of a game to her," says Cameron, because Maya would rather play with the change and grab for bills she sees peeking from Mom's wallet.
But cash in the piggy bank will eventually reside in an interest-bearing account, and as both Maya and her balance grow, the game will turn into an education.
Teaching your children to save is one of the best gifts you can give them. But you may also want to pass on a more material legacy. To save for college, state-sponsored 529 plans are hard to beat.
As a parent or grandparent, you may have other savings goals for the kids in your life -- a down payment for a first house, money to pay off college loans, a head start on retirement or just-for-fun money. Or you may want to move assets out of your own taxable estate. Whatever your goals, you have a number of ways to give kids a push toward becoming a millionaire . . .
Open a custodial account.
The quick-and-easy way to give children money, stock or other assets is through a custodial account. (Minor children also have to open a custodial account in order to save or invest their own money.)
Depending on the law in your state, custodial accounts go by the name of UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act). It's simple to set up an account and name a custodian -- often yourself -- to manage it while your child is still a minor.
Assets in the account belong to your child, but the custodian can distribute them for the child's "use and benefit." That could include summer camp or private-school tuition, but not a parent's legal support obligations.
Drawbacks. Convenient as they are, custodial accounts have a number of drawbacks. For one, the gift is irrevocable. Once you give money to a child, you can't get it back, nor can you transfer it to a sibling. Also, custodial accounts are considered a child's asset in college financial-aid calculations, so they're assessed more heavily than parental assets.
Another problem: Kids get control of their money once they reach the age of majority in their state -- generally at 21. So be prepared to live with the result -- which may be red, shiny and parked in your driveway.
Tax considerations. And then there's the tax issue. The IRS used to look favorably upon custodial accounts; earnings in the accounts were typically taxed at a child's lower rate. Not anymore. In 2008, the first $900 of a child's investment income is tax-free, and the next $900 is taxed at the child's rate. After that, however, dependents younger than age 19, as well as dependent full-time students younger than 24, are subject to the so-called "kiddie tax" -- meaning that unearned income in excess of $1,800 is taxed at their parents' higher rate.
As a result of the tax changes, custodial accounts are best for small sums of money or appreciating assets your child won't need to sell until he or she is beyond the reach of the kiddie tax. Assuming 5% earnings, for instance, your child's account would have to exceed $36,000 before triggering this year's tax.
If you're worried about control of the account, bear in mind that if the donor, the custodian or the child live in different states, you may open the account in whichever state has the strictest provisions.
POSTED BY: John McCann (January 09, 2008 06:42 PM)
I sure hope I'm wrong, but I believe there is a mistake in the explanation of tax considerations. The "Tax Increase Prevention and Reconciliation Act of 2005" seems to have eliminated the $900/$1800 benefit that you describe as all of it is now taxed at the parents rate until the kids are 18. This renders utma/ugma accounts as useless and it is amazing how few people know this, so hopefully I am wrong.
POSTED BY: Kevin McCormally (January 10, 2008 12:06 PM)
John --
I'm the Editorial Director for Kiplinger's. You should be happy to know that the change in the kiddie tax age didn't affect the basic rule. For 2008 the first $900 of a dependent's unearned income is protected by the child's standard deduction, the next $900 is taxed at the child's rate (10%). Only excess income is hit by the kiddie tax, i.e., the parents' rate. So, custodial accounts can still have a tax benefit.
POSTED BY: Doug Low (January 18, 2008 01:43 PM)
I hope you can confirm this statement "in 2008 kids can make a Roth contribution of up to $5,000 or 100% of their earned income". Does that include any kind of earned income, including that NOT reported to the IRS? For example, if my son had a job where he recieved a W-2 form, and also mowed lawns on the side and was paid in cash, can he add the income earned from both jobs as his "total earned income"? If so, how do you record/report for the Roth IRA the cash earned?
Reprint Article
