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I've been looking at everything I can find about custodial accounts in the last few days, but I still am a little confused.

My son is 2. We're considering sending him to private school in the next few years, but haven't made a decision. We'd like to put some money away, in case we decide on private school. We're going to make a decision in the next year.

I'd like to put $3K in a 12-month CD for him. I found a local CD at 4.25%. I'm trying to decide if it's worth it to put it in a custodial account, or just keep it in my name. If we put about 3K in the CD, he's only earning about $127. If I understand correctly, the first $700 in interest is tax-free. The second $700 in interest is taxed at the child rate. After that, it's taxed at the parents rate.

Are there any reasons I shouldn't put the money in a custodial account?

Thanks for your help.

-Leia
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I'd like to put $3K in a 12-month CD for him. I found a local CD at 4.25%. I'm trying to decide if it's worth it to put it in a custodial account, or just keep it in my name. If we put about 3K in the CD, he's only earning about $127. If I understand correctly, the first $700 in interest is tax-free. The second $700 in interest is taxed at the child rate. After that, it's taxed at the parents rate.

Are there any reasons I shouldn't put the money in a custodial account?


You may want to also consider a Coverdell account which can be used for college as well as education prior to college. The gains are not taxed when used for qualified educational expenses. Here's some information :
http://www.fairmark.com/college/saving/coverdell/

Your custodial account would have the advantage of being able to be used for many things to benefit your child other than education and has no limit(other than gift issues) on the contributions.

rad
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Are there any reasons I shouldn't put the money in a custodial account?

Yes... once you put the money in the custodial account, it legally belongs to your son. You can't legally reclaim those funds for your own use. If you don't spend the money by the time your son reaches the age of majority (18 or 21 depending on state), he gains immediate access to it and can use it for any purpose he wishes.

Ira

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Thank you both for your responses. I think we're going to put a small amount of money in a custodial account for him. I looked at a few places for a Coverdell, but I don't think it's the right option for us because of fees. If we end up not needing it for private school, we could always transfer it to his College Illinois (prepaid college tuition) fund.

Thanks again.

-Leia
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