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Author: TchrP Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8140  
Subject: Re: Starting Early Date: 5/24/1998 7:17 PM
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A lot depends on how much money is involved and whose money it is.

One of the first things that comes to mind is an Education IRA for each child, but there are significant limits. First, the maximum annual contribution *per beneficiary* is only $500, no matter who contributes it. Second, the contributor has to fall below income ceilings of $95K (single) or $150K (couple).
An advantage is that the earnings are completely tax free when used for post-secondary education. Another advantage is that the penalty for any other use of the funds discourages the young person from taking the money and buying a fancy car or whatever.

In general, any other earnings on a young child's account will be taxable at the parents' rate. This is the so-called "kiddie tax," and it applies until the child is 14.

For information about gifts to children under the UTMA or UGMA, see http://www.fairmark.com/custacct/index.htm where there is a full description of custodial accounts.

A real problem with accounts in the child's name is that the money becomes the child's absolutely at 18, 21, or whatever age of majority applies in that state. The parents have no control whatsoever over it after that.

Some states have college-savings plans for their residents that may or may not be attractive, and some have tuition prepayment plans. The prepayment plans are generally unattractive because there is no way of predicting where the kid will go to college, but some people like them because they often have price guarantees.

The parents might want to consider putting funds in Roth IRAs for themselves, as a retirement investment that *can* be used for college expenses if they need it. The amounts of their actual contributions can be withdrawn tax-free and penalty-free, and the earnings can be withdrawn penalty-free for college expenses, although they would be subject to income tax. For an explanation, see http://www.fairmark.com/rothira/college.htm
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