I am considering opening a custodial account for my 5 year old son. If I decide to close the account after 5 or 6 years and cash it in, how will I be taxed on the funds. Alternately, if I need to partially redeem securities within the account intermittantly before he reaches majority age, how am I taxed on those redemptions?
[[I am considering opening a custodial account for my 5 year old son. If I decide to close the account after 5 or 6 years and cash it in, how will I be taxed on the funds.]]Generally, YOU won't be taxed on the funds. In most custodial type of accounts (such as Uniform Gift to Minors Act accounts), you are actually gifting the funds to the kids, but are acting as custodian to invest and properly otherwise control the funds. If you "give" the funds to your child, and then take those funds back in the future, you are actually stealing from your child. You really should invest some additional time in reading my posts on UGMA/UTMA accounts and the kiddie tax issues in the Taxes FAQ area for some additional foundation on this issue. You might also want to check out the UGMA section of the Fairmark tax site (http://www.fairmark.com) for a wonderful discussion of the pros and cons of UGMA/UTMA issues.[[ Alternately, if I need to partially redeem securities within the account intermittantly before he reaches majority age, how am I taxed on those redemptions?]]Again, because it is the KIDS money, the KIDS will be responsible for paying the taxes. You are simply controlling the money. But the actual funds belong to the children. So, again, if you take funds from these accounts for your own personal use, you are in effect stealing from your child. So if you really think that you'll need these funds in the future, don't give 'em away now.We also discuss UGMA/UTMA accounts and other gift issues in The Motley Fool Investment Tax Guide. You might want to check it out.TMF TaxesRoyWant to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book…if I do say so myself). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.
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