Happy Birthday? Watch Out for Age-Sensitive Tax Rules

Here's an overview of age-sensitive tax issues:

Age 18: The Kiddie Tax rules cease to apply to a dependent child's unearned income (typically meaning investment income), starting with the year the child turns 18. For earlier years, a dependent child's unearned income in excess of the applicable annual threshold is taxed at the parent's marginal federal rate (which can be as high as 35%). For 2007, the threshold is $1,700 (same as for 2006). The good news is that a dependent child's unearned income below the threshold is taxed at more favorable rates (usually no more than 10% or 15%). For more on the Kiddie Tax, click here.

Age 18 or 21: A custodial account set up for your minor child will come under the child's control when he or she reaches the local age of majority (generally, 18 or 21 depending on your state of residence). Custodial accounts are also known as UGMA (Uniform Gifts to Minors) accounts and UTMA (Uniform Transfers to Minors) accounts.

Age 30: If you set up a Coverdell Education Savings Account (CESA) for a child or grandchild, it must be liquidated within 30 days after he or she turns 30 years old. To the extent earnings included in a CESA distribution are not used for qualified education expenses, they are subject to federal income tax plus a 10% penalty. Alternatively, you can roll over the CESA account balance into another CESA account set up for a younger family member. For more on these accounts, click here.

Age 50: If you're age 50 or older as of the end of the year, you can make an additional catch-up contribution to your 401(k) plan (up to $5,000 for 2007), Section 403(b) tax deferred annuity plan (up to $5,000 for 2007), governmental Section 457 plan (up to $5,000 for 2007), or SIMPLE plan (up to $2,500 for 2007). This assumes your plan permits catch-up contributions. You can also make an additional catch-up contribution (up to $1,000 for 2007; ditto for 2006) to a traditional IRA or Roth IRA. For more on 401(k)s and IRAs, see our retirement section.

Age 55: If you permanently leave your job for any reason, you can receive distributions from your former employer's qualified retirement plan(s) without being socked with the 10% premature withdrawal penalty tax. This is an exception to the general rule that distributions received before age 59 1/2 are hit with a 10% penalty.

Age 59 1/2: You can receive distributions from all types of tax-favored retirement plans and accounts (IRAs, 401(k)s, pensions, and the like) and from tax-deferred annuities without being socked with the 10% premature withdrawal penalty tax.