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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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