Custodial Accounts

Custodial accounts can be excellent vehicles for accumulating assets to finance a child's education. Depending on what state you reside in, two varieties of custodial accounts are available:

• Uniform Gifts to Minors Act (UGMA)
  These accounts can hold cash, securities, mutual funds, and insurance policies.
  
  
• Uniform Transfer to Minors Act (UTMA)
  These accounts can hold almost any type of asset, including non-financial assets.

How The Account Is Taxed

Unlike 529 Plans or Education Savings Accounts, a custodial account does not enjoy tax-deferred growth. The account is subject to annual taxation.

The first $750 of annual investment earnings from a custodial account are considered to be tax-free. Earnings in excess of $750 are taxable. The rate of tax depends on the beneficiary's age.

The rates are:

• Under age 14
  Investment earnings between $750 and $1,500 are taxed at the child's rate. Additional investment earnings are taxed at the parents' top rate.
• Age 14 and older
  All investment earnings above the first $750 are taxed at the rate.

Custodial Account Advantages

There are several significant advantages to custodial accounts, including:

• No income limitations
  Regardless of your income, you are eligible to contribute to a custodial account.
  
  
• No contribution ceilings
  Unlike Coverdell Education Savings Accounts and 529 College Savings Plans, custodial accounts have no ceiling on the amount that you contribute.
  
  
• Flexibility for withdrawals
  Withdrawals from a custodial account are not restricted to higher-education uses. The money is available as needed for other purposes that benefit the child.
  
  
• An excellent estate-planning tool
  Anyone can transfer $11,000 a year to a custodial account without federal gift tax consequences. Married couples who file jointly can transfer $22,000 without gift tax consequences.
  
  
• You retain control over the assets
  A custodial account lets you give money to a child and retain control over it as long as the child is a minor. You could see your gift grow to a sizeable amount by the time college tuition bills start.

The custodial account is truly a gift, as the assets in the account are legally the child's. When that child reaches age 21 (or 18, in seven of the states and the District of Columbia), control of the money automatically shifts to him or her. For some investors, this can be a concern. However, by age 21, most college students are juniors or seniors and the money you hoped would help pay for college costs will have been doing its job for years. Distributions can hurt your child's chances of receiving financial aid.

Savings Bonds

Middle- to low-income households seeking a safe investment may want to consider savings bonds, such as Series EE bonds issued after 1989 and all Series I bonds. If your child does not attend college, you won't be penalized for using the proceeds for something else – but, of course, you won't get the tax break.

Taxable Accounts

By investing money for your children in a regular brokerage account, you will have greater control, unlimited investment options, and the flexibility to use the money for any purpose. Like savings bonds and 529 Savings Plans in the parents' names, taxable accounts have little effect on how much financial aid your child may receive.

Call us at 800-PNC-6111 to schedule an appointment to discuss your investment needs.