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Tax Burden: 529 with No College at End vs. Simple Custodial Account under UGTM

I have posted before about my desire to set up an account for a 1yr old's future. My original idea was to set up a simple custodial account for her. But now I am considering a 529 savings account. Whether she will go to college is unclear. Even supposing her intentions are good but for some reason she doesn't go, what will be the tax burden on her parents? Let's assume the entire amount needed (which I have estimated) is about $120,000 with her four-year college ending in 21 years. I am assuming annual contributions of about $3000 to achieve this based on a college cost calculator. In CT, where she lives, each entire annual amount would be tax deductible for her parents. Also I assume complete deductibility at the federal level so that no taxes are ever paid *unless* she doesn't go to college. My understanding is that tax must then be paid on the entire gain, treated as income, to both the state and the IRS, and that this payment must be in a lump sum covering the whole period. Further I understand the IRS will assess a 10% penalty. Is this all correct? If she ends up by not going to college, would there have been a significant advantage to have had a simple custodial account governed by UGTM? On this, I understand there would be no taxes paid until her income reached $8500. I am not aware of other tax advantages, but I may be wrong. If she goes to college, I assume it is clearly of advantage to use a 529. But what I am trying to figure out is: Is the overall tax burden significantly worse with a 529 in which she *doesn't* go to college, versus the use of a custodial account? Thank you for your help. I know this is complex. Let's assume equal rates or return on both accounts. Frank

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Reply to
frank1492
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deposit is post tax money, not deductible. Not like an IRA or 401(k). The earnings/growth are tax free if used for college.

Well, the custodial account growth could be all long term cap gains and/or dividends, taxed now at 15% max. But the withdrawal is taxed at the marginal rate whatever that is at the time of withdrawal, and also 10% penalty. This could be quite the hit if she doesn't go to college.

Reply to
joetaxpayer

None. Any tax consequence of unqualified distributions is hers, not her parents'.

Bad assumption. These contributions are not deductible for Federal purposes. I know nothing about CT law, but it wouldn't hurt to triple-check your assumption there.

No. See IRS Publication 970 for information about rollovers and nonqualified distributions.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

I am sorry- the wording was poor. I meant that any

*earnings* from the account are not taxed. I never thought the deposits would be.

So, with the custodial account, what would the taxes on the account earnings be during her childhood? I have assumed zero until she starts to work or has earnings from other sources in which case she moves into a meaningful tax bracket. And I don't understand the 10% penalty since we don't have a 529 here and the funds are not assigned to a specific potential use. Could you please give me a brief primer on custodial accounts, not including the issue of college? When in her lifetime would taxes on account earnings start to be other than 0, assuming no withdrawals are made? (I assume 15% max on earnings after this point, and withdrawals at the marginal rate existing at the time they are made.) Thanks for all your help.

Reply to
frank1492

I assumed the parents might need to help out!

Sorry, I realized the contributions were not deductible.

I have looked there It sure looks to me as if withdrawals not used for educational purposes are taxed as regular income and subject to a 10% IRS penalty. If *none* of the accumulated amount is used for education, and all is withdrawn at once for other use, I assume you'd have to pay taxes on the full amount of the withdrawal which is what I thought I said above. No? I can't find what would happen on these plus a 10% penalty

Reply to
frank1492

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