Custodial Accounts for College Funding

By: fedweek

If you’re considering creating a custodial account in your child’s name to fund his or her college education, you’ll find it simple and inexpensive. But there are disadvantages: Children under age 14 are subject to the “kiddie tax” so investment income in excess of $1,400 per year (in 2000) will be taxed at the parents’ rate. When the child comes of age, as early as age 18, he or she is entitled to the money in a custodial account, so there’s no guarantee the funds will be used to pay for college. Also, financial aid formulas penalize students with money in their own name.