With custodial accounts, there are no income limits, contribution limits, or withdrawal penalties. In the future, if you want you can also move this money out of the account and into a 529 plan (tax-advantaged college saving plan/a.k.a. qualified tuition plans) as they near college age.
Because the account is also in your children’s name, it has the potential to reduce the financial aid eligibility for your children in the future. Schools expect that 20% of the investments in a custodial account should be used for education.
Parents and Grandparents are allowed to gift money into custodial accounts on a yearly basis and are able to transfer up to $15,000 under the annual gift exclusion amount. More than this amount can open the sender and receiver up to additional tax issues – so don’t give more than that!
The main reason I opened the custodial accounts for my children was to show them first hand, the power of investing. I wanted to be able to show them how their own money has grown by using sound investment techniques.