If you are looking to save taxes, fund your child's education and perhaps even purchase a car or computer for your child, then you may want to consider opening a custodial account

Custodial accounts allow anyone, such as a parent or grandparent, to contribute up to $10,000 per year ($20,000 if married) to the account in the child's name. When the minor reaches the age of custodianship (usually 18 or 21 depending on the state in which they live) the child gains control of the assets in the account. Before investing in a custodial account, you should realize that the child will legally control the account at age of custodianship and at that time may use the funds for whatever purpose he or she chooses.

Any financial institution can easily establish a custodial account for any child with a Social Security number. Assets donated to the account can be invested in mutual funds, stocks, bonds or kept as cash.

One of the most popular benefits of a custodial account is the potential tax savings. Interest, dividends and capital gains earned by investments in the custodial account are not taxed up to $750. The next $750 in income earned by the account is taxed at the child's tax rate, typically 15 percent (10 percent for capital gains). After $1,500 in income is realized, additional income is taxed at the parents' rate until the child reaches the age of 14. Once the child is 14, taxes are assessed at the child's tax rate.

Custodial accounts can also be used to save on estate taxes. Grandparents or others can establish custodial accounts for children and designate a custodian to oversee the account. It is important to designate a custodian other than a donor or contributor for the accounts. If the person who is the custodian of the account contributes to the account, then dies, the assets in the account will be included as part of the deceased's estate. Keep in mind that establishing a custodial account solely for estate-planning purposes is only advantageous if your estate is worth more than $675,000 in 2001. Estate taxes are not levied on estates valued at less than $675,000 in 2001.

One drawback to custodial accounts is that 35 percent of the account's value can be counted as assets of the child for financial aid purposes, potentially reducing the amount of financial aid a child can receive. In contrast, only 5.6 percent of a parent's assets are considered to be available to pay college expenses.

One way to maximize the benefits of a custodial account is to invest in a 529 college savings plan for your child's education and use a custodial account to pay for related expenses such as buying a car or computer, or pay the taxes on a 529 distribution. Custodial accounts stipulate that while a custodian controls the account, any funds withdrawn for the account must be used for the benefit of the child.

To avoid having assets in the custodial account reduce financial aid, it may be wise to spend down the account prior to applying for financial aid. Contributions to both a custodial account and a 529 plan count as an annual exclusion gift. You must make sure the total of your combined contributions do not exceed the allowable limit. Please consult your financial consultant for guidelines. .

Before establishing a custodial account you should consider both your financial objectives and the financial objectives of the child for whom you are establishing the account. Your financial consultant can help you choose the best way to invest.


401(k) Do's and Don'ts

401(k) plans have existed for about 20 years now, just long enough for the first participants to begin funding their retirement. These "pioneers" of 401(k) investing are now reaping the rewards of retirement planning. They have also learned some of the pitfalls of 401(k) investing. What follows is a short list of the do's and don'ts of 401(k) plans. This list is not comprehensive, and you should consult your investment professional for further advice.

- Do Participate -
Approximately 200,000 employers offer 401(k) plans to their employees. In most of these plans, employers match a portion of the employee's contributions, which translates into free money for the investor. A 401(k) plan also shelters the investment from taxes until the money is withdrawn.

- Don't Forget Your Spouse -
You should invest as much as possible in your 401(k) plan. Typically you can invest as much as 15 percent of your annual income or a maximum of $10,500 per year. When deciding how much to invest, you should consider what 401(k) benefits and options your spouse may have. If he or she has more investment options or a greater employer match, it may be better for him or her to invest a larger percentage of his or her income.

- Do Diversify -
Most 401(k) plans have several different investments vehicles in which to allocate your contributions. Consider your 401(k) plan as part of your overall portfolio and invest accordingly.

- Don't Borrow From Your 401(k) -
When you borrow from your 401(k) you reduce the amount of money that is compounding, tax deferred for your retirement. Even though you are paying back the money you borrowed, often it is not at the same interest rate your money would be earning if it were invested. Also if you were to borrow, using a home equity loan, for example, you would most likely be able to deduct the interest you paid from your taxes. Interest paid back to a 401(k) is not tax deductible.

- Do Re-allocate -
Your investment needs will change as you age and because your 401(k) is part of your investment portfolio, you should review how its assets are allocated. You will want to have your assets allocated differently when you are in your twenties vs. when you are in your forties or fifties. Also, consider reviewing your 401(k) allocation when you have major life changing events such as marriage or a child.

- Don't Wing It -
Investing in your 401(k) is serious business. Your future and when you can retire is on the line. Talk to an investment professional about what investment strategies are right for you. It could be the difference between retiring at age 50 or age 65. While 401(k) plans are rapidly becoming one of the most popular ways to save, they are not the only way to invest for retirement. Plans like Individual Retirement Accounts and annuities are two other alternatives. Regardless of what is available, you should save for your retirement. Talk to your financial consultant about what may be right for you.