Every parent wants to give their child the best chance for success in life. Setting up a custodial account is one way to give your child a financial head start.
Simply put, a custodial account is an investment or other financial account in the name of a minor. Although the assets in the account are fully owned by the child, they are managed by an adult custodian.
When the child reaches the age of majority, he or she can take over control of the account. This allows you and your family or friends to make tax-free gifts to your child while they are still young, without giving them control over the assets.
What Is a Custodial Account and How Does It Work?
The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor. Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities.
In a broader sense, a custodial account can mean any account maintained by a fiduciarily responsible party on behalf of a beneficiary. Such as an employer-based retirement account handled for eligible employees by a plan administrator. A fiduciary is bound ethically and legally to act on the best behalf of another’s interests.
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Why Did We Choose This Path?
Schwab has the best overall custodial accounts in the business for a few reasons.
One of the top reasons to work with Schwab when opening a custodial account is that the brokerage firm makes. It is very simple and inexpensive. There are no minimum deposit requirements and fees to worry about. You can get started with a small financial gift. The broker doesn’t charge you a commission later when you buy stocks, mutual funds, and ETFs.
The comprehensive review process at Nerd Wallet evaluates and ranks the largest U.S. brokers by assets under management, as well as emerging industry players. Our goal is to provide an independent evaluation of providers so that you can make sound, informed decisions about which ones will best meet your needs.
We follow strict editorial integrity guidelines. We collect data from providers directly through detailed questionnaires and conduct first-hand testing. And observation through provider demonstrations. The questionnaire responses, combined with demonstrations, interviews with provider personnel. And hands-on research by our specialists, fuel our proprietary assessment process. Which scores each provider’s performance across more than 20 factors.
The final result yields star ratings ranging from poor (1 star) to excellent (5 stars). Ratings are rounded to the nearest whole number.
How To Select the Most Appropriate Custodial Account?
The best custodial account is the one that fits you and your child’s needs. Fidelity can be a great choice if you want a good account for teaching your child about investing, while Merrill is a solid pick if you’re looking for a hands-off way to invest.
Look for accounts that keep fees low, because fees can have a major impact on the performance of your investment portfolio, especially over the long term. Also, consider how easy it will be to manage the account. You may want to use your current brokerage firm for a new custodial account simply for the convenience of keeping everything in one place.
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What is the Difference Between a UGMA and UTMA Account?
The main difference between UGMA and UTMA is that UGMA stands for Uniform Gift to Minors Act, and it is a type of custodial savings account that is used by families to support their children in times of need; it allows the donation of basic assets and matures when the beneficiary reaches the age of 18. On the other hand, UTMA is a custodial savings account that can be used for supporting children as well as for other purposes; it allows a reader range of options.
UGMA (Uniform Gifts to Minors Act) accounts are custodial accounts typically set up by parents, guardians, grandparents, or other relatives, who then serve as custodians for the child’s account until reaching the age of majority in their particular state.
In most places, this is 18, but other places require the minor to be 21 or older.
When friends and family contribute money to a UGMA account opened through a bank or stockbroker, they do not fall subject to annual contribution limits.
Though, when others make financial gifts, they become irrevocable, meaning they can’t be taken back from the minor once transferred. For this reason, it may be important to consult a lawyer or other qualified professional before setting up an account.
Are Custodial Accounts Taxed?
Yes, custodial accounts are subject to taxation. The first $1,050 earned in the account is tax-free for beneficiaries under the age of 19 or under the age of 24 who are enrolled full-time in school. The next $1,050 is taxed at the child’s tax rate. And any remaining amount is taxed at the federal tax rate of the account custodian.
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Methodology:
The comprehensive review process at Nerd Wallet evaluates and ranks the largest U.S. brokers by assets under management, as well as emerging industry players. Our goal is to provide an independent evaluation of providers so that you can make sound, informed decisions about which ones will best meet your needs. We follow strict editorial integrity guidelines.
We collect data from providers directly through detailed questionnaires. Conduct first-hand testing and observation through provider demonstrations. The questionnaire responses, combined with demonstrations, interviews with provider personnel. And hands-on research by our specialists, fuel our proprietary assessment process. Which scores each provider’s performance across more than 20 factors. The final result yields star ratings ranging from poor (one star) to excellent (five stars).
Final Verdict
If you decide to set up a custodial account for your kid, compare shop among these brokerage options. And others by reviewing fees, account minimums, and investment menus to select the best choice for your situation.