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Answer:
Dear
Ms. Weiss,
Yes
and no.
You
can purchase equity securities; however BUYandHOLD
does not offer bonds or fixed income securities.
The
standard vehicle for putting investments in a child's
name is a special account known as a custodial account.
Depending upon the state in which you live, the account
is officially called either a UGMA (Uniform Gifts
to Minors Act) or a UTMA (Uniform Transfers to Minors
Act).
The
account will be in your child's name. You will need
to provide the child's Social Security number and
address, the name of the custodian (which is usually
the parent) and the custodian's Social Security number.
All earnings from capital gains, interest and dividends
will remain in the account, in your child's name.
You
can also add to the account at any time. The minimum
dollar amount that you can enter for a specific trade
is $20. There is no annual cap on contributions.
About
taxes
Custodial
accounts come with a slight tax advantage -- that
the earnings below a certain dollar amount are taxed
at the child's rate rather than the parents' rate.
Typically, the child's rate is lower than that of
the parents.
However,
the Tax Increase Prevention & Reconciliation Act,
recently signed into law by President Bush, changed
the taxation rules somewhat. Specifically, it expanded
the reach of the "Kiddie Tax" making it applicable
to children under age 18. Previously it applied only
to children under age 14.
Now,
a minor's unearned income above $1,700 (per year)
is taxed at the parents' tax rate for children under
age 18 and not just for children under age 14.
This
change is intended to prevent parents from shifting
unearned income to children in a lower tax bracket.
Two
concerns
There
are two potential disadvantages to custodial accounts
you should know about.
(1)
When your child turns 18 (or 21 in some states),
that's officially known as reaching "majority." Click
here for legal age requirements. At that point,
control of all the money in the account is
automatically turned over to the child. All the gifts
to the account, even those from grandparents and other
relatives, are irrevocable. If your child decides
to spend the money collecting Jaguars, on a two-year
trip around the world, or to join a cult group you
disapprove of, there is nothing you can do about it.
Solution:
If this concerns you, ask your lawyer to set up an
irrevocable trust in which you spell out the circumstances
in which money can be withdrawn and at what age the
money is turned over to your child.
(2)
The money in your child's name could reduce any "need-based"
aid for college. The majority of junior and four-year
colleges and universities in this country use what's
known as a needs-based aid formula. This formula determines
what percentage of assets held in the child's name
and in the parents' name must be contributed to the
cost of college each year -- the child's assets are
assessed at a rate of 35% while the parents' at a
top rate of 5.64%.
Solution:
For an up-to-date and clear explanation of the need-based
aid formula, go to: www.finaid.org/savings.
Click on "Account Ownership." Then discuss this factor
with your accountant to determine how and if it will
affect your family.
Bottom
line: Before setting up a custodial account, click
HERE
to read about the Coverdell Account, also available
at BUYandHOLD. You may decide it offers a better solution,
or an additional solution, for building a college
savings account.
Good
luck!
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