Jun 22, 2018
5 Things to Know About Custodial Accounts
Find out about taxes, ownership, financial aid considerations and more
Custodial accounts are one way to start saving for a child’s future.
But what exactly is a custodial account?
They’re essentially brokerage accounts for children, with some investing and tax benefits. When you set up an account for a child, you’ll be able to invest funds in stocks, bonds, cash, and other market securities on their behalf.
Custodial accounts have been around for decades. They’re also known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. Generally speaking, different states typically allow one versus another. UTMAs allow for investments in more types of assets, including real estate. UGMAs confine themselves to more traditional securities.
Here are five rules you need to keep in mind for custodial accounts.
1. Any adult can open one for a child.
That means a parent, grandparent, aunt or uncle, for example. You’ll need some basic information, however, including the child’s name, date of birth, and social security number.
2. The assets belong to the child.
Any securities or funds transferred into a custodial account immediately and irrevocably become the property of the minor. However, the custodian has the sole responsibility of managing the assets until the beneficiary becomes an adult, and the custodial relationship concludes.
3. A custodian can take cash out of the account at any time.
However, those funds must be used to benefit the minor, according to section 14(a) of the Uniform Transfers to Minors Act, which establishes the legal framework for custodial accounts.
4. The account may be subject to taxes.
The custodian can put up to $15,000 into the account annually, without triggering the gift tax for 2018. (For married couples, the amount is $30,000.) The gift tax is a federal tax on any transfer of assets from one person to another that exceeds these amounts. The first $1,050 of income, or capital gains, from the account is not taxed annually. After that, it’s taxed at the child’s rate, generally between 10% and 15%. Any amount over $2,100 is then taxed at the custodian’s higher individual income tax rate, according to the most recent information from the IRS.
It’s always best to consult a professional tax advisor to discuss tax considerations.
5. Financial aid considerations.
A custodial account counts as an asset for the beneficiary and can affect the ability of your child to get financial aid, potentially reducing the amount of assistance they receive.
Like any investment account that holds stocks, bonds, mutual funds and other securities, the value can rise and fall depending on market conditions.
Invest in their futures
Open a custodial account for the kids in your lifeStart now
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