What is a Custodial Account?

When it comes to saving, there are many different avenues a person can take in order to reach their goals. Anything from a piggy bank, a savings account, or even a trust fund can be a huge advantage in a young person’s life. At the end of the day, many parents recognize the importance of saving and just want to give their kids a head start. And this is a great thing! If you are looking to save money for your kids then a custodial account may be the answer for you. 

What is a custodial account?

First thing first. What is a custodial account? Well, a custodial account is an account that parents (or guardians) can set up and manage on their children’s behalf. The child takes it over once they become a legal adult. Each state has specific rules and regulations about the age of maturity as well as the naming of custodians and alternate custodians. However, most states require that the account be transferred to the child when they reach 18 or 21 years of age. 

In considering the question ‘What is a custodial account?’, it is important to understand that there are two types of custodial accounts: 

  • Uniform Gifts to Minors Act (UGMA) which holds financial assets and is limited to financial products only. This includes cash, securities, annuities, and insurance policies. In the United States, these accounts can be opened in all 50 states. 
  • Uniform Transfers to Minors Act (UTMA) which covers financial products and also can hold property and real estate investment trusts (EITs). This can include real estate, artwork, and money. An advantage of this type of account is that it holds both tangible and intangible assets, making it a little more flexible than a UGMA account. The only states that do not allow this type of account are South Carolina and Vermont.

Is a custodial account right for you and your child?

If you want to know whether a custodial account is right for you, it’s important to first understand your savings goals for your child. For some situations, like if your child has inherited or been gifted money, you could use the custodial account for their benefit. However, if the child would like more control over their finances then another option may be more suitable to you. Here are some situations that could work well with a custodial account:

  • Your child got birthday money from an aunt, uncle, or grandparent etc
  • Your child was rewarded for good grades
  • You are investing for your child
  • You want to set up a good savings foundation for your child
  • You want to teach your child the importance of money management

Now, let’s say a parent’s goal was to save for college. Then the child decided not to go. In that case, the child will still get access to the money regardless. This just goes to show that no matter the situation, your child is entitled to their account and it’s always good to have some money safely saved!

How to open a custodial account?

So now that we’ve briefly answered ‘What is a custodial account?’, let’s talk about how to open one. The good thing about opening up a new custodial account is that it is super easy! All you need is three things!

The requirements needed in order to set up a custodial account are the child’s full name, date of birth, and their Social Security Number. Once it’s set up, the parent is able to manage all of the actions in the account like deposits and even deciding which assets to invest in. Most times, a custodial account is opened by a parent or guardian. However, other people such as grandparents, family members, and even friends can also open an account for a minor. So, if you were thinking about using this as a unique and long lasting gift for another person, it’s definitely possible and could be a great way to provide a child you care about with a more secure financial future.

The pros and cons of a custodial account?

When asking ‘What is a custodial account?’, it’s important to weigh up the pros and the cons. Just like anything else, there are both advantages and disadvantages of owning a custodial account, and we talk about these in detail on our UTMA and UGMA Basics blog. For now, here are a few to think about below:

Pros

  • Allows for variety in terms of investment
  • Efficient – they are easy to set up and establish, while being easy to maintain on an ongoing basis
  • Flexible account – contributions can be made by anyone and there is flexibility in withdrawals for different stages of life
  • No income, contribution, or withdrawal limits
  • You can earn more than the initial amount put in
  • It is for the financial benefit of another person, so can be a fantastic gift
  • Can be used as a teaching opportunity about financial freedom, money management, types of assets, performance reports, etc.

Cons

  • Once set up, the account and its contents belong to the beneficiary
  • First $17k is gift tax exempt
  • Financial aid penalty – the account counts towards assets if financial aid is being applied for
What happens when your child reaches the age to access their custodial account, a.k.a. age of maturity?

Depending on the state’s legal age usually, (either 18 or 21) the account is then transferred to their ownership and they have full control. Voila! All the money saved, transferred to, and the investments made on their behalf for their future become theirs.

FAQs

  • Who controls a custodial account?

The custodian, or person who sets up the account for the beneficiary, controls how money is spent and invested until the beneficiary reaches maturity.

  • What are the responsibilities of the custodian?

The responsibilities of that custodian is to manage the account, they can invest in most assets, and use the funds in the account only if it is in the beneficiary’s best interest. 

  • Who can contribute to a custodial account?  

Once the account has been established, any adult can contribute to it and the deposit cannot be revoked.

  • Can withdrawals be made with a custodial account? 

Yes, you can withdraw money from the account as long as it is for the child, such as, but not limited to, educational expenses. 

  • Does the custodian still have control over the account when the child is of-age to own the account?

No, when the minor is at the legal age where they can control the account, the custodian must transfer it to the child. 

  • Can a custodial account be used to pay for a child’s expenses?

Technically yes, all assets in the custodial account must be used for the benefit of the minor. This is very broad and there is certainly room for interpretation, but it should only be used for appropriate purposes.

Conclusion

And that’s everything you need to know about ‘What is a custodial account?’. If you think this saving process is right for you and your minor, then consider taking the easy steps needed in order to open and set up a custodial account. It is a great way to get ahead. Additionally, now that you are here and are obviously already interested in saving for your child’s future, then I have another great tip that I bet you would love to try. Investing is another great way to manage money and create lifelong wealth. It goes hand and hand with saving! Invstr is a great tool to use to get started. Our investing app for kids can be downloaded on Google Play Store and App Store and is the #1 Rated Investment App For Education by Bankrate. Included in the app are education models and other goodies too. Not only that, but if you are looking for something that is geared towards families, then we’ve got you covered. The best part is…

You can open a custodial account!

Yep, this is one of the features included in Invstr Jr! For just $7.99 a month, you can set your child rewardable goals, teaching them money management and responsibility skills. It doesn’t end there. This price includes up to four kids and the accounts transfer to them once they turn 18. Then the parent or guardian will no longer have access. Another perk for parents is that they can get real–time updates on requests when a child wants to suggest a stock to invest in. That way, the whole family can learn to become financially savvy together and you can approve every financial step they take!

If you want to open an Invstr Jr custodial account for your child, all you need to do is to open an account first, then set one up for them! All you will need is the child’s full name, date of birth, and SSN. Invstr Jr is only available to U.S citizens.

If you’re under 18 and want to set up an account, you have to share the link or email with your parent or guardian so they can set up their Invstr account first.

Then you’re all set!

If you already have an account with us, just click on the Jr link in the side panel which leads to the steps of making an account. Furthermore, when you join Invstr+ you can get a $30 investment on us when you fund your account to kickstart your portfolio!

Happy saving!

We are not tax experts and anyone seeking to open a custodian account should seek help from their tax advisor.

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