Custodial Account For Your Child

Custodial accounts are usually managed by financial institutions such as banks or credit unions.

What Is A Custodial Account?

A custodial account is a financial account such as a savings account that an adult controls for a minor under the age of 18 or 21, depending on the state’s regulations where they reside.

How Does A Custodial Account Operate?

A custodial account, once opened, functions similarly to any other bank or stock account. The custodian, also known as the designated manager or financial adviser, makes the investment decisions.

The custodial account does not have to be utilized by a parent to save for their child. Grandparents, guardians, aunts, uncles, and other relatives can use custodial accounts to assist a child in saving money.

Who Can Open A Custodial Account?

The Uniform Transfers to Minors Act (UTMA) and the Uniform Gift to Minors Act (UGMA) are the two types of custodial accounts. The form of adult-controlled investment account you provide is the crucial distinction between them.  

Types Of Custodial Accounts

Custodial accounts offer a great deal of freedom. There are no annual contribution limits on income or contributions, and there are no requirements to make monthly payments at any time. 

Benefits Of Custodial Accounts

Custodial accounts provide certain tax advantages; however, they are not tax-deferred like IRAs. The gains are taxed at the minor’s rate up to a particular level since the IRS considers the young child the account’s owner. 

Tax Advantages For Custodial Accounts

Because the holdings are considered investments, they may lower a child’s qualification for financial assistance when applying for funds for college. It might also make it more difficult for them to receive other federal support. 

Downsides Of Custodial Accounts

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