Controlling the Custodial Cash - questions and answers about personal finance and investments - Column

Kiplinger's Personal Finance Magazine, Oct, 1999 by Kimberly Lankford

It's not hard to use up the money before kids grab the purse strings.

My grandmother recently sent four $10,000 checks to my family--one check in the name of each family member, including my two young children. Are we restricted to investing the money designated for each child in a uniform-gifts-to-minor account, or can we place it in regular accounts in my wife's and my names? We're going to invest it for college, but we would prefer to maintain control over the money.

--RON WEAVER, Belton, Tex.

As long as the checks were made out to your children, you're legally required to invest the money in their names. If your grandmother had made the checks out to you and your wife instead, there could be a gift-tax problem for her--an individual can give up to $10,000 per person per year without being subject to gift taxes (the limit doubles if a spouse joins in the gift).

Still, opening a custodial account for each of your kids won't force you to give up as much control as you'd think. If you're the custodian, you're in charge of how the money is invested and can spend it for the child's benefit until he reaches the distribution age. Because that age is 21 in most states, including Texas, you could use it for the first few years of college and maybe use it all up before your kid gets control of the money. You could also, say, buy a computer for your child, or even a car--as long as it's for the child and not for the whole family.

How day trading works

Lately, and especially after this summer's Atlanta shootings, the term "day trading" has been all over the news. What exactly is a day trader? Do day traders have to sell all of their holdings at the end of the trading day?

--THOMAS MARTIN, Manchester, N.H.

Thanks to the Internet and ultracheap commissions, a lot of investors have become active traders; many even make several transactions a day from their home computers. But technically, day traders use special computer systems that allow direct access to the stock market. Day traders typically buy thousand-dollar blocks of stock that appear to have upward price momentum and try to lock in profits when they see even tiny upward movements in the price. They usually sell all their holdings by the end of the day--even before they go to lunch--making it an incredibly stressful way to invest. "The next day, I don't know what's going to happen," says Scott Raybin, director of customer service for All-Tech Investment Group, one of two day-trading firms hit in the Atlanta shootings in July. "Why take the risk?"

Day traders usually pay moderately high commissions--for example, $25 per trade at All-Tech--to use computer systems that let them keep an eye on the "spreads"--how much the market makers will buy and sell the stock for--and have their orders filled within seconds. And they often borrow up to half of the money they invest from their brokerage firm--and sometimes from the other traders at the firm. That can increase gains, but it can also magnify losses.

You need at least $25,000 to open an account at All-Tech, but the minimum is $50,000 at many day-trading firms. Many traders spend their day in front of computers at the firms, but they may be able to dial into the trading system from home for a hefty fee ($250 a month at All-Tech). For a first-person account of a day trader's experiences, see "Day Tripping" (May 1997) and "Skewered" (Oct. 1998). Both are available on www.kiplinger.com; search for "day trader."

Slam-dunk deductions for Job-search expenses

I am an Army officer soon to separate from the military. Will I be able to deduct my job-search expenses? Would this cover travel to and from job interviews and meetings?

--JOHN MARRO, Sierra Vista, Ariz.

You can deduct many of the expenses related to your job search--whether or not you end up getting hired--as long as the new job is in the same field as your current job. The same rules apply when you're leaving the military, as long as you can prove that your new job uses the same skills as your old one, says Martin Nissenbaum, national director of personal income-tax planning for Ernst & Young. If you were a computer programmer doing weapons work in the Army, for example, you'd need to show that you would be using the same skills as a computer programmer for a consulting firm.

As long as you're looking in the same field, you can deduct most expenses related to the search (but only to the extent that they exceed 2% of your adjusted gross income, and only if you itemize): the cost of job-hunting phone calls and mailings, employment-agency fees, and the cost of printing resumes. You can also deduct the cost of lodging when you're traveling for job-search meetings. And you can deduct the cost of transportation if your trip is primarily for your job search.

"You have to keep extremely accurate records," says Carol Thompson, an enrolled agent (who's authorized to represent taxpayers before the IRS) in Monterey, Cal. She encourages clients to keep a log of whom they meet with (including business cards and copies of applications and letters), where and when they meet, and a description of the job.