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Feb 12, 2018

What Is a Custodial Account? 5 Quick Answers for Your Family

By Jeremy Quittner

Want to save for your kids’ future? Read on.

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Planning to save for your kids’ future? Stash custodial accounts1—essentially, investment accounts for children—may help you meet your goals2. You can fund the account and manage the investments, and your child gains access to the account when they reach adulthood. And you can always use the assets in the account for your child’s benefit before they’re grown up.

Here are five quick answers to your “What is a custodial account?” questions.

1. What is a custodial account?

A custodial account is an investment account opened and controlled by an adult (the custodian) on behalf of a child (the beneficiary). The custodian can invest in any combination of individual stocks or funds on Stash’s platform.

2. Are there different types of custodial accounts?

Yes, there are two types of custodial accounts; depending on the state you live in, the account may fall under one of two legal frameworks:

In most states, only one type of custodial account is allowed. Stash offers custodial accounts of both types, so you can choose whichever is allowed by applicable law in your state.

3. Who can open a custodial account?

Any adult can open a custodial account for a child. It’s common for parents to open custodial accounts for their children, but any adult–grandparent, aunt, uncle, godparent, chosen family member, and so on—can open one. To be clear, the adult who opens the account is the custodian of the account, not necessarily the child’s custodian.

The custodian will need some information to open the account, including the child’s full name, date of birth and social security number.

4. Who funds the account?

Generally, the custodian makes the contributions to the custodial account, although sometimes a different person, called a donor, funds the account. There’s no limit to how much a custodian can put into an account each year—this applies to all types of custodial accounts—and no maximum lifetime limit. Once the account is funded, the custodian controls the investments.

5. Who do the assets in the account belong to?

Any securities or funds transferred into a custodial account immediately and irrevocably become the child’s property. But until they reach adulthood, they cannot use the account themselves—meaning that the child can’t deposit or withdraw funds or manage the assets.

The custodian is solely responsible for managing the assets in the account until the child reaches the age of majority—that is, the age at which the child is legally considered an adult, which ranges from age 18 to 21, depending on state law. (In some states, such as Ohio and California, the age of majority can extend to 25.)

The custodian has the authority to withdraw cash while the child is a minor—but funds must be used to benefit the minor. Keep in mind that there may be charges, including liquidation fees and back-end fees, for mutual funds or other securities.

Once the minor becomes an adult, they can use the assets for anything they wish— the custodian no longer controls how the funds are used.

Do custodial accounts impact taxes or financial aid?

They might. If you plan to open a custodial account, you may want to learn more about the tax implications and the potential impact on the child’s ability to get financial aid for college. This article breaks down the details of custodial account rules.

Family-style investing from Stash

Now that the question of “What is a custodial account?” is answered, you can explore how opening one could help you provide for your child’s future. You might even find that it’s a wonderful opportunity for your whole family to learn more about investing together.

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Jeremy Quittner is the editorial director for Stash.

1 For children, Stash offers access to UGMA/UTMA accounts. 

2 The adult (or Custodian) who opens the account can manage the money and investments until the minor reaches the “age of majority.” That age is usually 18 or 21, depending on the Custodian’s state. The money in a kid’s portfolio is the property of the minor. Money in a kid’s portfolio can be used by the parent or legal guardian, but only to do things that benefit the child.

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