Tax question

Ok lots of folks have kids so…If I open an account for a minor child- say a custodial education account for her…do I get a tax break too?

I know that she will when she gets to 18 and uses the funds for college…and hopefully not stripper college…but in the mean time I wondered if I get a break as well for money I put into the account.

Disclaimer: I am not your financial advisor and am not licensed to give advice. You should consult a qualified tax advisor in your state, especially about 529s which vary on a per-state basis.

There are two main types of education specific tax-advantaged savings accounts: 529s and Coverdell ESAs. There are some differences between them (age requirements, contribution limits, per-state rules on 529s, etc) but in both cases you, as the contributor, are gifting the money to the minor. So unfortunately you do not get a federal tax credit the way you do with IRA contributions. Some states have variations on 529s that do allow small tax credits though. It can be confusing because Coverdell ESAs are sometimes colloquially referred to as “education retirement accounts”, but they are analogous to Roth IRAs, not regular IRAs. :(

The benefit to the plans is tax-free growth for the minor (as long as used for qualified expenses). So you can gift $2K or whatever and with any luck the brat will have $10K or more by the time they’re going to college. Also the kid won’t owe any tax on the $10K as long as used correctly.

edit: spelling and clarified federal tax status

In Missouri, each parent can give $8K to their childrens’ 529 plan(s). This is a total amount, so if you have 8 kids, you could only do, say, $1K per kid. But that’s $16K total for the parents, per year.

That money is deductible at the state, but not federal level. In Missouri, this effectively amplifies what you’re giving by about 6% (the typical Missouri tax rate).

And, as mentioned above, once it’s in the 529, the money grows tax free (federal AND state).

The usual disclaimer: Details will vary by state. I am not a lawyer or accountant. Consult an accountant, etc…

California here…

Ok good bits to think on. I figured that the primary or most likely sole benefit is to the kid. I saw the Coverdell plan and wasn’t sure how that worked but if it is similar to the Roth IRA then I get it.

I will look in to the possibility of a State deduction.

Disclaimer…this is an internet forum…not a tax consulting one :D…so yeah, I will do my homework.

If you don’t get a 100% deduction for money used to send a person to stripper college, you should.

Rywill in '08!!!

I am with Rywill on stripper college. I think we should all kick in a few bucks to donate a pole, with a little memoiral plaque attached about hip high.

Paging DavidCPA… Paging DavidCPA…

Well, if you’re putting in 2k now and getting 10k out in X years and not paying taxes on that gain, then the person benefitting is you, so it’s not just the kid (assuming you’re paying for the education).

I guess it is my fault for bringing up the stripper thing…I do appreciate the offers though.