How to safely raid your kid’s college fund

There are a few other tax issues to consider with UGMA and UTMA accounts. While the law allows you to make withdrawals, Thomas notes that the IRS may take a dim view of continuing to report investment income at the child’s rate. But this probably won’t cost you much; you’re only paying the higher rate on the income generated — not on the total withdrawal.

You may also lose the child as a dependent on your return, if the money from the UTMA account ends up paying more than half of their living expenses.

For parents with a so-called 529 savings plan, the rules are simpler but will probably cost you more money. These state-by-state programs provide some generous tax advantages to make your savings grow faster. But if you use the money for anything other than educational costs, you have to pay tax on the investment income generated by the account — plus a 10 percent penalty. (Some states have additional penalties.) And if you took a tax deduction for your contributions to the plan, you’ll have to pay that back too.

If you’ve opened a 529 account for a child who doesn’t end up going to college, you can switch the beneficiary to another child or relative and use the money to pay their education expenses. Otherwise, you’ll have to pay the taxes and a penalty to close the account.

My parents took out a student loan in my name for college and a credit card for school expenses. They assured me that they were making payments on the loan and the credit card. I recently found out that this was not true. I have since paid off the loan and the credit card.

The problem now is, I tried to open a checking account at a local bank and was embarrassed to learn that they wouldn't accept me as a client due to the bad history on my credit report. I have been saving $200 per week and have no expenses as I live with my fiancée's family. How do I get these items taken care of quickly? I don't want to negatively affect my future wife's credit. 
— Kevin, Brookfield, Conn.

It sounds like it’s too late to sit your parents down and give them a good talking to. Unfortunately, the damage has been done.

Repairing bad credit generally just takes time. The negative impact of late payment or default fades with time. Generally, the worse the problem, the longer it takes. (As for your future wife’s credit, the fast one your parents pulled on you shouldn’t have an impact on her — unless the two of you open joint accounts together.)

You may come across various pitches for “credit repair” services and schemes that promise quick results. These are scams. The only thing that’s quick is the demand for an upfront fee for a service that will have no impact on your credit.

Instead, get copies of your credit report from the three credit reporting agencies and check to make sure that the information is accurate. If not, contact the agencies to have it corrected. You can also write a letter to the three agencies explaining what happened and ask that your note be included in your credit file, which they’re required to do.

You may also want to contact an accredited credit counselor in your area who can help you approach lenders that might take your somewhat unusual circumstances into consideration. Lenders make their own decisions about taking on a new customer, and they don’t always come to the same conclusion.

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