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Family Finances

Ask the Editors: Real-Life Family Finances Questions and Guidance

Kiplinger editors provide answers to readers' real-life concerns about paying for college, credit cards for teens, gift taxes, Roth IRAs for kids, and more.

In its March 2010 cover story, Kiplinger’s Personal Finance tackled real-life questions on the minds of many of our readers these days. Extending our mission of personal service, we invited readers to send us more questions to be answered in this exclusive online companion package.

IRAs and financial aid

My granddaughter is 18 and will graduate from high school in June 2010. She works part-time. I would like to fund a Roth IRA for her as a graduation gift. Will that count against her for college aid?

All colleges use the Free Application for Federal Financial Aid (FAFSA) to determine eligibility for federal money. The FAFSA does not include retirement accounts in calculating the family’s assets. Many private schools, however, use their own criteria for distributing their own money, and some schools do factor retirement accounts into the equation. That said, the hit may not be that significant, and because financial aid awards are based on the previous tax year, the account won’t affect your granddaughter’s award for the coming academic year.


Another way to help your grandkids: Put your own IRA to work.

Custodial accounts

Years ago, I set up a custodial account for my son, to be used for his college education. Now I understand that we may be penalized for having that account. How so?


If by “penalized” you mean “pay higher taxes,” you are correct. Custodial accounts, known as UGMAs or UTMAs, after the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) once let parents shift the tax on earnings from their own higher rate to the child’s for assets of the parents moved more their own accounts to these accounts for their children. This made the accounts a great way to accumulate college savings.

A change in the law, however, reduced this tax advantage. In 2010, children who are full-time students under age 24 pay no tax on the first $950 of investment earnings, and they pay the child’s rate on the next $950. But earnings above $1,900 are taxed at the parents’ marginal rate.

Custodial accounts can also harm your student’s eligibility for financial aid. The federal financial aid formula expects students to kick in 20% of their own assets to college costs before aid eligibility kicks in, and assets in UTMA and UGMA accounts are considered students’ assets. That’s a big bite compared to the 5.6% assessment on parent-owned assets. You can get around the problem by cashing out the account (you will have to pay any capital gains tax on the earnings) and transferring the funds to a 529 plan, where it is treated as a parental asset for financial aid purposes.


Paying off loans

I currently have two daughters attending college. They both took out Stafford loans, but I still need to cover a total of $25,000 a year. I’d like to tap my home equity for that amount. Should I refinance or take out a home equity line of credit?

The refinance gets you a fixed-interest rate, but you will have to borrow -- and pay interest on -- the entire amount (and if you have any chance of getting need-based financial aid, you definitely don’t want all that money sitting in the bank). The home equity line carries a variable interest rate, which could go up as well as down. However, you can borrow just the amount of money you need each year, so you won’t have a big balance to pay interest on. Go with the HELOC.

More options for in our Paying for College special report.


Roth IRAs for kids

I want to buy one stock of McDonald’s for each of my grandchildren, who are 1 and 3 years old. I’d like to buy it as a Roth IRA. Can I do this with money they received as gifts or an allowance? The amount of money I will invest will be less than $100 each.

It’s a wonderful idea to invest for your grandchildren’s future. Unfortunately, you can contribute to a Roth IRA on their behalf only if they have earned income from a job -- and at ages 1 and 3, that’s unlikely (unless they are, say, child models). You might want to consider contributing to a 529 college savings plan for them instead. The money is tax-free if used for qualified college expenses.

Gift taxes

My mother wants to help me and my wife. Can she give each of us more than $13,000 this year without tax implications for us?

Yes, she can give you more, but then she might have to pay tax on the amount in excess of $13,000. The giver, not the recipient, is the one who pays federal gift tax. Your mother would have to file a gift-tax return (Form 709) on any amount that exceeds the $13,000 annual per-person exclusion.

But we say “might” because the tax man grants a lot of leeway to givers when it comes to taxes. The law allows each person a $1 million lifetime exclusion from federal gift tax. You start building up to that $1 million limit for gifts that go above the $13,000 annual limit. So if your mother paid you each $20,000, she’d be adding $14,000 ($7,000 plus $7,000) toward that limit. Any amounts over $1 million trigger the gift tax, with rates as high as 35% in 2010. Note this: Any part of the credit used to protect taxable gifts (those more than $13,000 a year) from the gift tax effectively reduces the credit available to protect your estate from federal estate taxes after your death. Although the federal estate tax expired at the end of 2009, it is likely that it will be reinstated retroactively. In any event, the estate tax is scheduled to come back to life in 2011.

See The Gift Tax: Use It or Lose It and our report on Estate Planning.

Benefits for kids

I’m 64, my wife is 49 and we have a 13- year- old son. I’m employed and plan to work until at least age 68. It’s my understanding that I can draw my Social Security benefit at age 66, plus half of my benefit for my minor child until he is 19. Am I right in assuming that I can collect benefits for both myself and my minor son until he is no longer eligible, at which time I can stop my Social Security, pay back the money both he and I have received, without interest, and then start collecting benefits on my own again when I turn 70?

You are correct that under current law, if you collect Social Security retirement benefits and you have a minor dependent child under age 18 (through age 19 if still in high school), your child is also eligible for benefits up to half of the amount you receive. You are also correct that under current law, you can suspend your benefits (by filing Form 521), repay all the benefits that both you AND any dependents have received, interest free, and then restart your benefits at a higher level based on your older age at the time. But we can’t guarantee that these rules won’t change in the future as Congress eventually tackles Social Security reform.

See more: Max out your Social Security.

Gift or inheritance?

A relative gave me some silver bullion and his coin collections before he passed away. There is no documentation (will, etc.) showing that he passed these assets on to me. Do I consider them a gift or an inheritance? If I sell the silver bullion or coins, do I have to report any capital gains to the IRS?

Your relative’s generosity qualifies as a gift, so if you sell the asssets you must use the decedent's basis and you’ll owe capital gains taxes. The gain is considered a collectibles gain, which is taxed at a maximum rate of 28%. If there are no records, you’ll have to use a good-faith estimate of what the decedent paid. It’s too bad you didn't inherit the collection. In that case, you would have inherited what probably would have been a higher basis at the time of the original owner’s death.

See more: Figure the Cost Basis for Gifts.