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Finance questions: CDs for kids can save some taxes

You asked: What are the pros and cons of CDs bought with minors' names as owners and my name as custodian? Friends tell me that buying CDs in my grandchildren's names would save me on taxes because the IRS does not tax minors.

By Helen Huntley, Times Personal Finance Editor
Published February 10, 2008

You asked

What are the pros and cons of CDs bought with minors' names as owners and my name as custodian? Friends tell me that buying CDs in my grandchildren's names would save me on taxes because the IRS does not tax minors.

Children do not pay taxes on the first $850 of investment income. If you title your CDs as you propose, you will save on your taxes but the money legally will belong to your grandchildren. You cannot take it back if you need it and they will be entitled to full control at age 21 or 18 in some states other than Florida.

If you are interested in giving money to your young grandchildren, you can ask the bank to set up the CDs under the Uniform Transfer to Minors Act. You or another adult must act as custodian for a minor.

Money titled in the name of a child may reduce eligibility for college financial aid. An alternative is to use the money to set up a 529 college savings plan, such as the Florida College Investment Plan (www.florida529plans.com). This type of plan is treated more favorably under the financial aid formula.

What are penny stocks?

Penny stocks are simply low-priced stocks, which means less than $5 a share by one common definition. They are considered high risk because often they are unproven start-up companies or companies that have fallen on hard times.

A customer of mine asked me about investing in the Iraqi dinar, stating that once the Iraq war has ended, the dinar would skyrocket, earning you thousands. I believe this to be a scam, or at least an unwise investment.

I'm with you. Dinars do not trade on regular currency exchanges. Rather, they are sold through eBay and other Web sites, which makes buying them more like buying a collectible than a currency investment. Who knows what will happen when the war ends? What's to stop the government from printing lots more dinars? What's to stop counterfeiters from doing it?

Reader response

Perhaps you'd consider Prince Charming Isn't Coming: How Women Get Smart About Moneyby Barbara Stanny as part of your reply to the person who wanted to learn about money. This is a very good, fundamentally sound and informative little book whose pages on questions to ask a potential financial adviser are timeless. She makes it interesting by including her big mistakes. I have given this book to many friends who are struggling with or confused about money.

Judith Sterling, Redington Shores

Next week's question: Do you have a question about income taxes?

To ask a question or make a comment, e-mail hhuntley@sptimes.com or write Helen Huntley, P.O. Box 1121, St. Petersburg, FL 33731. Visit her MoneyTalk blog (blogs.tampabay.com/money) for more money information.

[Last modified February 8, 2008, 21:49:55]