Author Topic: Kids savings account options  (Read 406 times)

HamsterStache

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Kids savings account options
« on: January 24, 2019, 07:48:08 AM »
Right now I have two kids savings accounts, one for each of my young sons. One is with Capital One, with my oldest as the primary account holder and me as the custodian. The other account is with Capital One 360 with me as the primary account holder and my youngest as a minor secondary account holder. With tax season, I've realized that for the one where I am the primary holder, I'm responsible for taxes on the interest earned on that account. If I wanted to change ownership I would have to close that account and open a new one. Talk to me about advantages both ways. Does it make a big difference either way? The tax liability is probably never going to be a major deal as I can't imagine the account yielding significant interest any time soon, but there must be reasons to have it set up one way or the other.

nereo

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Re: Kids savings account options
« Reply #1 on: January 24, 2019, 01:27:20 PM »
Right now I have two kids savings accounts, one for each of my young sons. One is with Capital One, with my oldest as the primary account holder and me as the custodian. The other account is with Capital One 360 with me as the primary account holder and my youngest as a minor secondary account holder. With tax season, I've realized that for the one where I am the primary holder, I'm responsible for taxes on the interest earned on that account. If I wanted to change ownership I would have to close that account and open a new one. Talk to me about advantages both ways. Does it make a big difference either way? The tax liability is probably never going to be a major deal as I can't imagine the account yielding significant interest any time soon, but there must be reasons to have it set up one way or the other.

What kind of amounts are we talking about?  If the total amount is a few thousand dollars (and the interest earned is only a fraction of that) it won't be a big difference regardless of how its handled.   If its held in a UTMA account it will be taxed at the child's tax rate (which is likely to be 0 given the standard deduction, at least up until s/he starts working).

If you want zero capitol gains taxes you could place the money in a 529 savings account, with the caveat that your kids will either pay capitol gains taxes when the withdraw unless it is used for a qualifying educational expense (of which there are many).

HamsterStache

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Re: Kids savings account options
« Reply #2 on: January 24, 2019, 01:41:17 PM »
Right now I have two kids savings accounts, one for each of my young sons. One is with Capital One, with my oldest as the primary account holder and me as the custodian. The other account is with Capital One 360 with me as the primary account holder and my youngest as a minor secondary account holder. With tax season, I've realized that for the one where I am the primary holder, I'm responsible for taxes on the interest earned on that account. If I wanted to change ownership I would have to close that account and open a new one. Talk to me about advantages both ways. Does it make a big difference either way? The tax liability is probably never going to be a major deal as I can't imagine the account yielding significant interest any time soon, but there must be reasons to have it set up one way or the other.

What kind of amounts are we talking about?  If the total amount is a few thousand dollars (and the interest earned is only a fraction of that) it won't be a big difference regardless of how its handled.   If its held in a UTMA account it will be taxed at the child's tax rate (which is likely to be 0 given the standard deduction, at least up until s/he starts working).

If you want zero capitol gains taxes you could place the money in a 529 savings account, with the caveat that your kids will either pay capitol gains taxes when the withdraw unless it is used for a qualifying educational expense (of which there are many).

That was my thinking as well since we're not talking large amounts (the account earned I think $12 in interest this year) but it got me thinking and wondering if there was anything I wasn't thinking about regarding advantages to having it one way or another.

I've thought about a 529 but haven't reached a decision on if we want to go that route or not yet since I don't like the idea of the money's usage being restricted, even if education will be a likely expense down the road. For context we have a one year old and a three year old so just starting out with regards to mini mustaches :-)

nereo

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Re: Kids savings account options
« Reply #3 on: January 24, 2019, 02:15:27 PM »
The 529 is actually not a bad option for these sorts of things.  If they withdraw the money for a non-qualified expense it is no worse than any other taxable savings account (because contributions are post-tax anyway).  If they use it for education they get that money tax free.  Could be a nice way of teaching them a little about taxation and efficient tax strategies.

With ~$12/year in capitol gains you aren't talking about much regardless of your choices.

HamsterStache

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Re: Kids savings account options
« Reply #4 on: January 25, 2019, 07:30:56 AM »
If they withdraw the money for a non-qualified expense it is no worse than any other taxable savings account

Point well taken - I think I will start with their next birthday checks. It looks contributions to our state's plan are tax deductible, so that's a nice potential perk.

nereo

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Re: Kids savings account options
« Reply #5 on: January 25, 2019, 07:40:37 AM »
If they withdraw the money for a non-qualified expense it is no worse than any other taxable savings account

Point well taken - I think I will start with their next birthday checks. It looks contributions to our state's plan are tax deductible, so that's a nice potential perk.
Good re: state taxes.  BUT - be aware that there is no requirement that you live or work in the state who's 529 you invest in (in other words, you can invest in ANY state's plan, even if you've never been to that state).  Some plans are better than others, so it's worth it to check out options, fees and perks.

HamsterStache

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Re: Kids savings account options
« Reply #6 on: January 25, 2019, 07:52:41 AM »

[/quote]
Good re: state taxes.  BUT - be aware that there is no requirement that you live or work in the state who's 529 you invest in (in other words, you can invest in ANY state's plan, even if you've never been to that state).  Some plans are better than others, so it's worth it to check out options, fees and perks.
[/quote]

Yes, I am aware (always a good reminder though). I've barely started looking at the particulars, but with just a glance at our state's it seems like low fees and the tax deduction make it a strong candidate. I'll have to compare though - got a while before their next birthdays and I don't feel the need to rush the couple grand out of the savings accounts just to start a few months early, so I've got time to do some comparisons.