Money held in accounts set up under Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) must be spent on purchases that clearly are for the benefit of your minor child. The custodian cannot spend the money on anyone but the child.

The income earned in the account is taxed at the child’s lower marginal rate, if under state law the account legally belongs to the child and the parent is not permitted to use it to discharge support obligations. However, in the case of children under the age of 18, the unearned income (interest, dividends, etc.) taxable to the child will be taxed at the parents’ higher marginal rate. To the extent that income from the account is used for the minor child’s support, it may be taxed to the parent who is legally obligated for the support. State laws differ as to a parent’s obligation to support. The income will be taxable to the parent only to the extent that it is actually used to discharge the obligation.

Also, transfers under UTMA or UGMA generally qualify for the annual gift tax exclusion ($12,000). Finally, the value of the property transferred under UTMA or UGMA is includable in the estate of the donor (parent-custodian) if he or she dies while serving in that capacity.

If you suffer a loss on investments you hold inside your IRA, you may be able to treat the loss as a deduction on your individual tax return.

In order to qualify, all amounts in all of your accounts (Traditional and ROTH) must be distributed to you and the total distributions must be less than your unrecovered basis. Your basis is the total nondeductible contribution in all of your IRA accounts.

The resulting loss may be claimed as a miscellaneous itemized deduction, subject to the 2% floor, on Schedule A, of your Form 1040.

Before deciding to distribute your IRA accounts in order to deduct a loss, you should consult with your advisor about the long-term implications of your retirement objectives.

TIPS are a special type of Treasury note and bond. Interest is paid every six months and the payment of principal occurs at maturity as with most other types of notes and bonds. But, with TIPS, interest and redemption payments are adjusted for inflation as measured by the CPI-U. At maturity, the TIPS note/bond is redeemed at its inflation-adjusted principal amount or its original par value, whichever is greater. Also, as with most other notes/bonds, TIPS pay a fixed rate of interest. However, the fixed rate is applied to the inflation-adjusted principal, and not the par amount of the security. As a result, if inflation occurs throughout the life of the security, each interest payment will be greater than the previous one.

TIPS are exempt from state income tax and subject to federal income tax. In any year when the principal grows, the increase is taxable in that year, even though you will not receive the inflation-adjusted principal until the security matures. Because of this, TIPS should be held in a tax-deferred account, rather than in a taxable account.

Many investors in recent years have put money into bonds or bond mutual funds in order to receive interest income and to assure that their investment will not decline in value.

Be aware that you can lose principal in a bond investment. A decline in value primarily depends on interest rate fluctuations.

All bonds are affected by interest rate risk, regardless of the issuer’s credit rating or whether the bond is “insured” or “guaranteed.” For example, you purchased a 30-year bond when 30 year Treasuries were yielding 4%. Now you want to sell the bond and interest rates for the same maturity are currently 10%. Why would someone purchase your bond, with a coupon rate of 4%, when they can buy a new issue paying 10%? If you really need to sell it, the only thing you can do is mark down your bond. You would have to mark down the price to where it would yield 10%. That would be about 30 cents on the dollar, or about $300 per bond. As a result, you would have to sell your $1,000 bond for $300, resulting in a $700 loss.

Interest rate risk impacts long-term bonds more than short-term bonds. The best protection is to own short (under one year) or intermediate (between one and ten years)
maturities.