CUSTODIAL ACCOUNT: Best Custodial Accounts 2022

Custodial Account
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Want to learn about how a custodial account works, how to open a custodial account, the types available, account rules, and who pays taxes on it? If so, then read on.

Before we proceed, let’s throw light on what custodial account means.  

The Meaning of Custodial Account

A custodial account is the opening of a financial account for a child but the management is by an adult (custodian) to save for and in the name of the child (minor) until the child is of age to claim the account in the future. It has limits on some investments, like riskier asset stocks, depending on the type of account opened.

Custodial Brokerage Account

It is the same as the custodial accounts. The brokerage account is the best account to open as a custodian (adult or guardian) because of its longevity. Since it is a long-term investment and a low price to start with, you can save and invest in stocks, shares, bonds, e.t.c for your child (minor). This means that this kind of account brokerage has every asset investment the custodian(adult) wants to invest in for the child (minor) that is investing in and saving stocks, bonds, mutual funds, e.t.c. There is no limit to who can act as the custodian of the account, which means that the custodian can be two or more people acting in the brokerage as a joint custodial account.

What Is the Best Account to Open?

The best custodial account brokerage is Charles Schwab. The best choice for the brokerage account is due to its long history. which are the longevity of the firm, low fees, full support of their customers, and other services they offer. Plus taxes or no commission for their customers, which makes them the best even now in 2022. But there are other best or top-ranking custodial brokerage accounts like TD Ameritrade, Fidelity, Etrade, Vanguard, public, etc. Its account has uniform transfers to a minor act account(UTMA). But some top-ranking brokerage accounts have both (UGMA and UTMA).

The Benefits of a Custodial Account 

There are many reasons why parents/custodians should save/invest in their children (minors) for their future. Here are some reasons below:   

  • It has huge flexibility with no withdrawal penalties unless there is a pressing circumstance that will benefit the child, no specific contribution limits, no specific income, e.t.c. It’s not reversible or adjustable after saving or investing. 
  • It is cheaper to create or start with low fees or no fees if you are a member of the brokerage company. There are no contribution limits, and gifts sent to the account can be retrieved or collected depending on the open account.
  • It is the best place to save or invest for the child’s future at the right time. 
  • There are various tax benefits for individuals(minors) that have assets in an account. 
  • They assist the child with financial problems (for college).
  • They are financial gifts to the minor(child). 

How to Open a Custodial Account

  • To open a custodial account, you need to first know the basic information about yourself. That is the custodian(adult) and the beneficiary(child/minor) concerning age, date of birth, name, and social security number. 
  • The child must be under age 18 before opening the account. 
  • You locate a better firm that has a brokerage account either in person or online. Open the account you want for your minor.
  • Then check all the necessary information, like the fees and features, concerning the account before you make any decisions.
  • So follows the money, stocks, bonds, e.t.c that you want to invest for the child(minor).

Types of Custodial Account.

Here are the types of custodial accounts, namely;

#1. Uniform Gift to Minor Act Account (UGMA)

One of the types of custodial accounts is a uniform gift to a minor act account. Minors receive this type of account as a gift at the age of 18-21; some reach 25. Its accounts have limits on some assets, like cash, bonds, e.t.c. It is less flexible and does not accept riskier investments like (stock). The entitlement goes to minors at 18 years of age.

#2. Uniform Transfers to Minor Act Account (UTMA)

This is one of the types of custodial accounts associated with any kind of saving account or investment. Moreover, it’s the best and most significant account to use. It has unlimited stock access, cash, bonds, e.t.c., including real estate, e.t.c., for minors. Minors receive this type of account as a gift at the ages of 18–21 (some reach 25), depending on the types of custodial account policies or rules.

Custodial Account Rules

There are rules or principles guiding the custodial account depending on the type of custodial account you open.

  • One of the custodial rules is transfers of assets that are made to the minor at the due age, considering the type of account being opened by the custodian.
  • For tax benefits, some investment assets enjoy some tax buffer up to certain limits.
  • Funds can not be withdrawn by the custodian for personal use unless it is for the benefit or use of the minor(child).
  • It teaches you how to invest for your child’s future and build wealth that will last for a lifetime and more, depending on the type of investment made.
  • One of the rules of custodial is that it offers little complexity and great flexibility concerning how to invest in the account, e.t.c.
  • Investments or savings put into the account become the property of the minor and retrieving them back by the custodian is not possible.
  • Finally, the account can be of help to the minor on some level, like offering financial assistance for college(education).

Pros and Cons of Custodial Account

In the custodial account, they are pros and cons which are the following.

  • They have huge flexibility with no contribution limits, no withdrawal penalties, with different assets to invest in the account.
  • The first $1,150 of unearned income is tax-free, and after that, the tax is at a low rate depending on the type of custodial account for the minor. 
  • Transferring accounts to a minor is possible once they have reached the required age for the account.
  • Withdrawal is permissible only if it is in the interest of the minor.
  • There are no rules on how the money is spent by the beneficiary.
  • Beneficiaries are not changed unless the minor dies before the due time of the account.
  • It is easy and convenient to open a custodial account, and it is cheaper to start.
  • Once investment or savings starts in the account, it is irrevocable and cannot be retrieved by the custodian. It belongs to the minor.

Who Pays Taxes on the Custodial Account?

The “child” pays taxes on a custodial account. The income taken into the account belongs to the child. However, if it exceeds a certain amount, a file is brought forward for separate federal income tax using the forms 1040, 1040A, or 1040EZ. Through that medium, the minor is the one who pays the taxes on the custodial account. The child also pays the taxes on the custodial account through their parents, especially for couples. They will pay a sum of $15,000 into the account for each of their children. It will be used as an advantage for the annual federal gift tax and it will be done annually.

Fidelity Custodial Account

Fidelity is a brokerage account under the custodial account or the custodian to invest in stocks, bonds, etc., and savings for the child. It has both custodial accounts (UGMA and UTMA). They are part of the top-ranking custodial brokerage. It is easier and cheaper with low fees to do it in person or online for the custodian to open the account.

They treat any kind of investment for the accounting that the custodian wants. When opening a custodial account, you check the policies guiding it to know if it is suitable to make the investment in the account. If not suitable, they can choose another account they have like; a 529 account

Who Claims the Account if the Child Dies Before the Due Date?

The beneficiary can be changed if the child dies before the specified age. It’s up to you to fill in the applicable legislation. The custodian manages the minor’s financial savings/investment until the due date.

Depending on the company/accounting policies, when the child (minor) reaches the age of 18. Regardless of the beneficiary’s wishes, it is necessary to release funds held in trust for them. Only the conservatorship of the person’s estate can control such custodial funds.

You can close a custodial account and suffer no penalties if the custodian gives the funds to the minor or transfer them to another account for the minor’s benefit.

CUSTODIAL ACCOUNT FAQs

Can I invest with a custodial account?

Yes, you can invest in a custodial account for your minor(child) by opening an account with a brokerage account with UTMA or UGMA.

Is a custodial account the same as a savings account?

It is the same as savings, but in a higher way. The custodian invests in things like stocks, shares, bonds, funds, e.t.c. for the child till he/she reaches the due age to claim the account.

Is custodial account a good idea?

It is a good idea for the child/beneficiary of the custodian to open a custodial account as a gift, whether it is a UTMA or UGMA account set up for the benefit of the child.

Who pays taxes on custodial account?

The child pays the taxes on the account if the account income exceeds a certain amount of $1,100. The custodian has to open a separate file for the federal income tax return to pay the taxes through forms 1040, 1040A, e.t.c.

Can parents take money out of custodial account?

It is legally not allowed for parents or custodians to take money from the custodial account that is for their own expenses or to use it to open an account for another child. It is only allowed if it is for the benefit of the child.

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