If you have a minor child, there are several strategies to pursue for better tax management of money for your son or daughter.
* Assets held in a child’s name can qualify for low tax rates but the money must be held in a custodial account. When the child comes of age–as early as age 18 in many states–he or she will be entitled to that money, so it will be out of your reach then. If your son or daughter wants to squander the money instead of paying for college, there may not be much you can do.
To avoid this problem, you might act while you’re still custodian and spend the money on permissible expenses, which could include a computer for the student or private high school. You may want to check with a lawyer to see what a custodian is allowed to do in your state.
Another option is to transfer those assets into a trust, where safeguards can be put in place, while you’re still in control of the custodial account.
* If your child takes a part-time or seasonal job, she should put their earnings into a Roth IRA. Over time, those accounts can grow surprisingly large.
Even though this money is invested with after-tax dollars, it may be a good choice because the youngster’s tax bracket is likely much lower now than it will be when he retires.
On the other hand, compare what your student would lose to taxes with a traditional IRA, where investors avoid taxes now but pay later. For a youngster, the more a traditional IRA grows, the greater the tax on the back end.
Withdrawals from a Roth IRA are not taxable after you’ve had the account for five years and are at least 59 1/2 years old. A few thousand dollars invested in a Roth IRA now for someone under 20 could become a six-figure account after age 60.