What are the federal tax implications
or benefits?
The kiddie
tax applies to these accounts: A portion of the child's
earnings are tax free, another portion is taxable at the child's
usually lower tax rate. When investment earnings exceed the
top limit and the child is younger than 14, the excess earnings
will be taxed at the parents' rate.
Contributions are not deductible.
Earnings in the account grow tax-free. Withdrawals are tax-free
as long as the money is used for higher education.
Federal law imposes ordinary income tax and a 10 percent penalty
on earnings for non-qualified distributions.
Contributions are not deductible.
Earnings in the account grow tax-free. Withdrawals are tax-free
as long as the money is used for higher education.
Federal law imposes ordinary income tax and a 10 percent penalty
on earnings for non-qualified distributions.
Contributions are not deductible.
Earnings in the account grow tax-free. Withdrawals are tax-free
as long as the money is used for qualifying expenses at elementary,
secondary, and postsecondary schools.
Federal law imposes ordinary income tax and a 10 percent penalty
on earnings for non-qualified distributions.
When must the
funds be used?
The account
terminates when the child reaches 18 (most UGMAs) or 21 (most
UTMAs), depending on the state. At that time, the assets in
the account will belong to the child, who can spend the money
any way he or she chooses.
Most plans have
no time limits on the account. Money can be withdrawn at any
time, although tax and penalty may apply. The account beneficiary
may be switched to another family member at any time.
Most plans require
that the money be used within a certain period after the child
reaches college age. A change in beneficiary to another family
member may be possible. A request for refund may be subject
to tax, penalties, and cancellation fees.
Except for special
needs beneficiaries, the account must be used by the time the
beneficiary reaches age 30. The beneficiary may be switched
to another family member below age 30.
