Retirement & Financial Planning Report

Many parents create custodial accounts for their children under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). Such accounts provide a handy place to stash birthday gifts and other money children may acquire. They can provide tax savings, too.

That is, investment earnings within custodial accounts can be taxed at the child’s low rate, rather than the parents’ higher rate. However, such tactics might not be worthwhile now.

* Investment yields are low now. If bank accounts and bonds are paying 1% or 2% or 3% now, you won’t owe much tax on meager investment income. Shifting that income to your children won’t deliver much tax savings. Moreover, the "kiddie tax" limits the amount of investment income you can shift to children.

* You lose control. Once money moves into a custodial account, you can use it only for the child’s benefit. Your youngster will gain control of custodial assets after coming of age, usually on or before age 21.

* You may lose aid. The more assets in a child’s name, the less college financial aid your child will receive.

The bottom line is that many families will do well to keep custodial accounts modest. Consider them tools that can help children learn about money management. Many families will benefit by saving for a college education in the parents’ own name, rather than in a child’s custodial account.