"Phil Marti" <prm20871[at]verizon.net> wrote:
- quote -

I assumed the parents might need to help out!

- quote -

Sorry, I realized the contributions were not deductible.

- quote -

I have looked there It sure looks to me as if withdrawals
not used for educational purposes are taxed as regular
income and subject to a 10% IRS penalty. If *none* of the
accumulated amount is used for education, and all is
withdrawn at once for other use, I assume you'd have to pay
taxes on the full amount of the withdrawal which is what I
thought I said above. No? I can't find what would happen on
these plus a 10% penalty

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joetaxpayer <joetaxpayer[at]nospam.com> wrote:
- quote -

I am sorry- the wording was poor. I meant that any
*earnings* from the account are not taxed. I never thought
the deposits would be.

- quote -

So, with the custodial account, what would the taxes on the
account earnings be during her childhood? I have assumed
zero until she starts to work or has earnings from other
sources in which case she moves into a meaningful tax
bracket. And I don't understand the 10% penalty since we
don't have a 529 here and the funds are not assigned to a
specific potential use.

Could you please give me a brief primer on custodial
accounts, not including the issue of college? When in her
lifetime would taxes on account earnings start to be other
than 0, assuming no withdrawals are made? (I assume 15% max
on earnings after this point, and withdrawals at the
marginal rate existing at the time they are made.)

Thanks for all your help.

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"frank1492" <frank1492[at]verizon.net> wrote:

- quote -

None. Any tax consequence of unqualified distributions is
hers, not her parents'.

- quote -

Bad assumption. These contributions are not deductible for
Federal purposes. I know nothing about CT law, but it
wouldn't hurt to triple-check your assumption there.

- quote -

No. See IRS Publication 970 for information about rollovers
and nonqualified distributions.

--
Phil Marti
Clarksburg, MD

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frank1492 wrote:

- quote -

or 401(k). The earnings/growth are tax free if used for
college.

- quote -

Well, the custodial account growth could be all long term
cap gains and/or dividends, taxed now at 15% max. But the
withdrawal is taxed at the marginal rate whatever that is at
the time of withdrawal, and also 10% penalty. This could be
quite the hit if she doesn't go to college.

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I have posted before about my desire to set up an account
for a 1yr old's future. My original idea was to set up a
simple custodial account for her. But now I am considering
a 529 savings account.

Whether she will go to college is unclear. Even supposing
her intentions are good but for some reason she doesn't go,
what will be the tax burden on her parents?

Let's assume the entire amount needed (which I have
estimated) is about $120,000 with her four-year college
ending in 21 years. I am assuming annual contributions of
about $3000 to achieve this based on a college cost
calculator.

In CT, where she lives, each entire annual amount would be
tax deductible for her parents. Also I assume complete
deductibility at the federal level so that no taxes are ever
paid *unless* she doesn't go to college.

My understanding is that tax must then be paid on the entire
gain, treated as income, to both the state and the IRS, and
that this payment must be in a lump sum covering the whole
period. Further I understand the IRS will assess a 10%
penalty. Is this all correct?

If she ends up by not going to college, would there have
been a significant advantage to have had a simple custodial
account governed by UGTM? On this, I understand there would
be no taxes paid until her income reached $8500. I am not
aware of other tax advantages, but I may be wrong.

If she goes to college, I assume it is clearly of advantage
to use a 529. But what I am trying to figure out is: Is the
overall tax burden significantly worse with a 529 in which
she *doesn't* go to college, versus the use of a custodial
account?

Thank you for your help. I know this is complex. Let's
assume equal rates or return on both accounts.

Frank

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