Everything You Need to Know About Custodial Accounts
A custodial account is a great way to give a financial gift to a minor and teach them about investing. These accounts are set up and managed by an adult, then turned over when the recipient reaches adulthood. Learn more below to see if a custodial account is right for you.Custodial Account Benefits
- The money and assets legally belong to the minor, so the earnings are taxed at the minor’s (lower) tax rate.
- Opening a custodial account for a minor is a great way to teach a child about saving and investing.
- Custodial accounts offer similar wealth transfer benefits as a trust account with significantly less legal complication.
Custodial Account Limitations
- Any money that the adult contributor deposits into the custodial account becomes property of the minor and can only be used by the minor.
- Once contributed to one child's account, the money must remain in that child's account rather than being transferred between children's custodial accounts.
- Any adult can contribute to a child's custodial account. The custodian is the only individual with control over how the money is invested.
Additional Information
- Custodial accounts tend to invest in more conservative assets such as mutual funds, bonds, or stocks.
- Assets in custodial accounts are legally the child's, meaning they can weigh heavily in considerations for the Free Application for Federal Student Aid (FAFSA).
- Adults can make unlimited contributions into a custodial account. Contributions over $15,000 may face a gift tax.