Son says, 'Bag bonds, get me a mutual fund'
Q My son, who's 12, has a small stack of US savings bonds that he got from my in-laws years back. Recently he caught wind of the fact that his younger sister is invested in a mutual fund that's performing very well. He wants in. I gather we just have to take him to the bank and have him sign the bonds - which are in his name - in a bank official's presence to cash out so that he can reinvest. What are the tax implications? How should we set up the account?
Name withheld, Boston
A"If you have not been reporting the interest earnings annually to the IRS, you will have to declare the earnings for the tax year in which you cash out the bonds," says Gary Schatsky, an attorney and fee-only financial planner in New York.
For a child under age 14, the first $700 of earned interest is tax free. The next $700 is taxed at the child's rate, which is usually 15 percent.
Any earnings over $1,400 would be taxed at the parent's rate.
So if you had earnings above $1,400, you might want to hold some of the bonds and then cash them in after January 1, which would kick the potential tax over to the next tax year on that amount, Mr. Schatsky says.
As for the mutual-fund account, you would probably want to open it "in trust" for the child.
That way, if he ever did need to access the earnings, they would be taxed at his tax rate, not your rate, he says.
Q I rolled over my Roth IRA into a new account, but didn't realize there was a 10 percent tax withholding until my quarterly statement came. By then more than 60 days had passed. Is it too late to roll over the 10 percent withholding that I never received?
J.M., via e-mail
A "It depends on how you handled the transfer," says Tim Shmidl, a financial planner with Prism Group, Overland Park, Kan.
If your Roth provider made a direct rollover to your new IRA provider, then they should not have withheld the 10 percent tax, he says. Have them roll over that money, pronto.
But, alas, if you took possession of the account and made the rollover yourself, then it's too late to roll over the 10 percent. You would have had to do that within the 60 days, he says.
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