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My son, who is 7 months old, inherited a little bit of money (in the range of $10K - $20K). What's the best type of account that we should open for him? The money wasn't given as "college" money, so we don't want to limit ourselves and him to using it for education, but want the ability to invest it for him.

I've looked into UGMA and UTMA accounts, but those appear to be tied to our finances. This money was given to him directly, so I wanted to see if there is any other options.

  • What does "those appear to be tied to our finances" mean? A child has a kiddy tax issue on unearned income. But $1900/year is taxed at the 0/10% rates. So it will take some time before it's an issue. If this is what you're referring to. – JTP - Apologise to Monica Aug 6 '12 at 21:39
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Assuming that the will that bequeathed the money to your son did not stipulate any restrictions or set up a trust to hold the money until your son turns 25, or something like that, I don't think you have much choice except to put the money in a UTMA account (which of course can be invested in whatever the trustee (which could be you, or you and your wife jointly) decides. Note: not a UGMA account since the money is not a gift. You also don't have any option except to turn the account over to your son when he turns eighteen. The point is, the investment can be in anything as long as the account is registered as a UTMA account. But do remember also that your son is entitled to sue you for breach of fiduciary duty if you don't take good care of the money, so that blowing it all in risky investments is also not a good idea.

If you are worried about taxes and your son's income being taxed at your rate, one way of deferring the issue is to buy US Savings Bonds. The interest can be deferred from taxation until the bonds are redeemed.
Edit added in response to JoeTaxpayer's comments: But a better strategy is to declare the accrued interest each year as unearned income of the child on the kiddie tax form that is part of your tax return, and pay the tax, if any, that results To ease your mind or conscience, think of the tax that you pay on your child's behalf as a gift to your child! In any case, there will likely not be much tax due since the first $950 of unearned income of a child is tax-free and the next $950 taxed at 10%. Then, when the bonds are cashed in, the interest that accrued (and was "taxed") in earlier years can be deducted from the interest (cash in price minus purchase price) that you (or your son) will be told is the interest that the bonds earned. Of course, if kiddie tax is not a concern (and it shouldn't be, given the amount available for investment), an even better strategy is to set up the UTMA account(s) in long-term investments in low-cost index funds or ETFs (as JoeTaxpayer suggests) and pay the tax, if any, as it comes due.

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    The Kiddy tax doesn't apply until $1900 of unearned income. The first $950 is not taxed, next $950 taxed at 10%. It would take quite a bit of luck for this sub-$20K to be impacted by tax at the parents' rate. A good long term set of index funds, and properly timed buy/sell to create gains and bump up the basis may keep the tax man at bay for a while. – JTP - Apologise to Monica Aug 6 '12 at 22:25

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