Morningstar Advisor - Summer 2008 - (Page 37)

M Beneficiary takes control of the account at age of majority. M Beneficiaries must be under age 18 when contributions are made. M Assets must be distributed by age 30 or earnings are taxed as ordinary income plus a 10% penalty. M Account owners can only invest cash, not appreciated securities. M Assets are child’s for financial aid purposes. M Income taxed at trust rates, which are often higher than individual rates. M Child gains control at age of 21 unless he or she gives up privilege. M May decrease chances of receiving financial aid. M Gifts to trust are irrevocable. M Only one individual can be the beneficiary (so there’s no ability to change beneficiary). calculations. N Unused funds can be used for retirement. N Account owners can take a loan from 401(k) plan and pay it back over time. M For traditional IRAs, ordinary income tax will be due on full distributions. M For Roth IRAs, ordinary income tax will be due on the earnings portion of the distribution if withdrawn before owner reaches 59 1/2. If owner has reached 59 1/2 and has held account for less than five years, full distribution is taxfree. M Withdrawals may be counted as income in financial-aid formulas. M Dollars used to pay back 401(k) loan are essentially double-taxed. M Account owners may hinder their retirement funding. UTMA/UGMA N Easy to open. N Less expensive than setting up a trust. N Can invest in wide variety of investment vehicles. N Donor can gift appreciated securities and cash. M Beneficiary takes control of money at statutory age (usually age 21 for gift accounts). M Accounts must be terminated once the child reaches statutory age. M Income subject to “kiddie tax.” Parent responsible for making sure tax return is filed on the child’s behalf. M If parent is donor and custodian of the account and dies, the UTMA/UGMA becomes part of parent’s taxable estate. M Because the child owns the account, up to 20% of this money will be counted toward the family contribution when determining financialaid eligibility. M Gifts made to UTMA/UGMA accounts are irrevocable. M No ability to change beneficiary. Crummey Trust N Can invest in wide variety of investment vehicles. N Child does not gain control at age of majority, although child has right to withdraw contributions when made. N Trust can have more than one beneficiary. N Gifts qualify for $12,000 gift-tax exclusion. M Can be expensive to set up. M Assets are child’s for financial-aid purposes. M Beneficiary could exercise his or her withdrawal right over contributions. M Only trusts for single beneficiary can qualify for GST exclusion for grandchildren. Savings Bonds Standard Brokerage Account in Parents’ Names 2503(c) Minor’s Trust N Maximum investment flexibility. N Investors avoid layer of fees charged by 529s and Coverdells. N Parents control assets. N Keeps assets out of child’s ownership for financial-aid purposes. N If child doesn’t go to college, funds can be used for any purpose. M Capital gains and income are taxed. M Does not remove assets from parents’ estate for estate and gift-tax purposes. N Safe. N Interest exempt from state and local taxes. N Series EE bonds purchased after 1989 and all Series I bonds allow tax-exempt distributions if used for qualified education expenses and if income limits are met. N Can buy $30,000 each of I-bonds and EEbonds a year. N No penalty if not used for college. N No account-maintenance fees. M Muted returns. M Income restrictions limit interest exclusion from taxes. M Only bondholder, his or her spouse, or a dependent is eligible for the interest exclusion. If grandparent holds the bond, he or she can’t claim any interest exclusion unless the grandchild is dependent. M Interest exclusion may be reduced by other education tax breaks (HOPE Scholarship, Lifetime Learning Credit, scholarships, Coverdell withdrawals, Section 529 plan withdrawals) when used in the same tax year. M Bondholder forfeits three months of interest if redeemed within five years. M Bond owner must be at least 24 years old. N Can invest in wide variety of investment vehicles. N Trustee can spend money on behalf of minor until he or she reaches age 21. N Can contribute an unlimited amount, but gifts in excess of $12,000 (most likely $13,000 for 2009) per year per beneficiary may be subject to gift tax. M Can be expensive to set up. Retirement Accounts N No 10% penalty on IRA withdrawals if used to pay qualified expenses. N IRA balances are not part of financial-aid MorningstarAdvisor.com 37 http://MorningstarAdvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2008

Morningstar Advisor - Summer 2008 Contents Letter from the Editor Contributors Inbox College Planning: Solutions and Concerns ETFs: The Next Chapter Engineering Financial Advice Investment Briefs Flexible vs. Style-Pure Managers: The Evidence Forging a New Commodity Index Work Your Way Through College Planning Sizing Up the Options Best and Worst 529 College-Savings Plans A 529 Travel Guide 10 Tax-Smart Tips for College-Savings Planning Global Dialogue How Sequoia Cranks Out Good Returns Year After Year The Many Layers of David Winters Living on the Edge Stocks to Buy Once a Decade With Munis Feeling the Pain, Some Opportunities Arise Health Care Provides Shelter from Economic Storm Help Your Clients Get More Out of Their Bond Portfolios Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar New on MorningstarAdvisor.com Closer to Fine

Morningstar Advisor - Summer 2008

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