custodial accounts: alternatives to 529
Keep in mind that if only a portion of the
proceeds is used for qualified expenses, then
only that part of the interest is exempt.
However, if your adjusted gross income, or
AGI, exceeds a certain amount, the exemption
is phased out. For bonds cashed in 2007, the
exemption begins to disappear when the joint
AGI is $98,400 or $65,600 for a single parent.
The exemption completely disappears if the
joint AGI is $128,400 or $80,600 for a single.
These figures are adjusted annually for inflation.
A new online program
I and EE bonds were once sold and redeemed solely as a paper security, but now they're available in electronic form. As a TreasuryDirect account holder, you can buy, manage and redeem I and EE bonds online.
A new program called Smart
Exchange allows TreasuryDirect account
owners to convert their Series E, EE and I
paper savings bonds to electronic securities
in a special conversion linked account within
their online account.
|When you purchase bonds this way, the bonds are:
at face value; you pay $50 for a
in amounts of $25 or more, to the
maximum purchase in one calendar
electronically to your designated
If you redeem I or EE bonds within the first five years, you'll forfeit the three most recent months' interest. After five years, you won't be penalized.
When parents can afford to pay for their child's
college education or the family's income is
too high to receive financial aid, it is time
to consider a custodial account. Known as
the Uniform Transfer to Minors Act, or UTMA,
or Uniform Gifts to Minors Act, or UGMA, accounts,
they offer the most flexibility and up to
$850 a year in tax-free earnings. Any family
member can contribute to these accounts. Withdrawals
can be made at any time without penalties.
There is one potentially significant drawback: Money in a custodial account is an income-producing asset of the child, so it will be difficult to qualify for need-based financial aid. In addition, your child will have complete control of the money once he or she reaches the age of 18 (in most states). If your child decides to blow the money on a trip to Europe instead of using it for educational purposes, there is nothing you can do to legally stop him or her.