Retirement & Financial Planning Report

Should college savings be in the child’s name or the parents’ name?


If you’re confident of never needing the money and you don’t expect to qualify for financial aid, save in your child’s name, in a custodial account. In a custodial account, investment income will be taxed at the child’s low bracket. Under the so-called kiddie tax, children younger than 14 are entitled to $700 in investment income tax-free, in 2000, and another $700 taxed at 15% before the parents’ tax brackets take effect. After they reach age 14, children can have more than $20,000 in unearned income taxed at 15%. However, money saved in the child’s name can’t be retrieved: it belongs to the child. Moreover, money held in the child’s name will penalize parents hoping for need-based financial aid.