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Posted by frank1492 on April 5, 2007, 2:27 am
Please log in for more thread options > frank1492 wrote:
>> 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.
> I am not in Connecticut, but for federal purposes, the
> deposit is post tax money, not deductible. Not like an IRA
> or 401(k). The earnings/growth are tax free if used for
> college.
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.
>> 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.
> 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.
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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