Saving For College Using Personal Investment Accounts: Registering Your Account

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Whether you open a bank account, a brokerage account, or a mutual fund account, you have to provide the financial institution with some bare-bones information about yourself, namely your name, your address, and your Social Security number. You may also have to provide employment information and your date of birth. With this information, the institution can report your annual taxable earnings to you and the government for income tax purposes.

When you open that account, though, you'll have a variety of options as to how you want that account owned, or registered. The two most popular choices are individual ownership and joint tenants with the right of survivorship. You may also choose to register an account in the name of your minor child, either as a custodial account (which may accept only cash), or as an account opened under the Uniform Gift (or Transfer) to Minors Act, discussed below. What you choose may have a staggering difference in what happens to that account down the road.

Owning The Account All By Yourself

When you open an individual account (and you must be at least 18 years old to do so), only your name will appear on the account registration. You are the sole owner, and you're responsible for paying income tax on all the taxable earnings from the account.

Whenever you take money out of the account, you don't become subject to income tax on that withdrawal; however, should you take the money and give it to someone else, you may have to deal with Gift Tax and/or Generation-Skipping Transfer Tax issues, depending on the amount of the gift.

Be prepared with a plan in case you die. With an individual account, if you die without a valid last will and testament, the value in the account is divided according to the laws in your state. If you assume that the money will automatically go entirely to your spouse or kids, think again. Living parents or siblings may also get a cut. If you don't have a last will when you die, you may be able to avoid this scenario by setting up a so-called living trust or grantor trust and registering the account in the name of the trust.

Sharing Ownership

Joint tenants with right of survivorship (JTWRS) is typically what people think of when they refer to joint ownership, and for most people who use it, it works well. Joint tenants with right of survivorship means that two owners are listed on a particular account; in the event of the death of one of the owners, the other becomes the owner of all of the property inside the account.

When you open a JTWRS account, both account holders must supply all the required information. At tax reporting time, you are each responsible for half of the total tax due. If you hold the account jointly with your spouse and you file a joint income tax return, there's no problem. You report the full amount of your taxable income on the return. If, however, you hold the account jointly and you each file your own income tax returns, you need to split the income between the two of you so that you each pay tax on your half.