Want to start saving for your kids’ future? You’ve got options.
Custodial accounts are an easy way to build a financial foundation for your kids–and you can contribute to them until your child reaches adulthood.
Here’s everything you need to know about opening a custodial account on Stash.
What’s a custodial account?
It’s essentially a brokerage account for children, with some investing and tax benefits.
Custodial accounts have been around for decades. They’re also known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts. Generally speaking, different states typically allow one versus another. UTMAs allow for investments in more types of assets, including real estate. UGMAs confine themselves to more traditional securities.
Stash will offer both types of accounts, based on state requirements.
What goes into a custodial account?
A custodial account is just like an investment account, except it’s for your kids. Stash lets you create a portfolio in a custodial accounts using any combination of the individual stocks or funds on the Stash platform.
Who can open a custodial account?
Any adult–parent, grandparent, aunt or uncle, for example–can open up a custodial account for a minor. Generally speaking, only the custodian makes contributions to the custodial account.
You don’t have to be a parent to open a custodial account. For example, you can create an account for a niece, a goddaughter, a grandson. You’ll need some basic information, however, including their name, date of birth, and social security number.
Do the kids have to use the money for college?
No, the beneficiary can use the funds for anything, once they’ve reached adulthood, which ranges in age from 18 to 21, depending on state law. (In some states, such as Ohio and California, the age of majority can extend to 25.)
How much can you contribute to a custodial account?
There’s no limit to how much a custodian can put into an account each year, and no maximum lifetime limit.
Once the account is funded, you can invest the funds just like you would in any other investment account. That means the cash can be invested in stocks, bonds, mutual funds and ETFs. So a custodial account can be, potentially, a teaching tool to show your children how to invest, and how money can grow over time.
Who controls the money in a custodial account?
Any securities or funds transferred into a custodial account immediately and irrevocably become the property of the minor. However, The custodian has the sole responsibility of managing the assets until the beneficiary becomes an adult, and the custodial relationship concludes.
Nevertheless, the custodian can take cash out of the account at any time, as long as the funds are used to benefit the minor, according to section 14(a) of the Uniform Transfers to Minors Act, which establishes the legal framework for custodial accounts.
However, there may be charges including liquidation fees or any back end fees for mutual funds or other securities. The capital gains might also need to be reported on the child’s tax return, or the parent’s.
Once the minor becomes an adult, he or she can use the money for anything, not just education.
What about taxes?
The custodian can put up to $15,000 into the account annually, without triggering the gift tax for 2018. (For married couples, the amount is $30,000.) The gift tax is a federal tax on any transfer of assets from one person to another that exceeds these amounts.
Annual contributions, however, are not tax-deferred as they are with retirement accounts such as a traditional IRAs. Please consult a tax professional to further discuss the most ideal approach for your personal tax situation.
The first $1,050 of income, or capital gains, from the account is not taxed annually. After that, it’s taxed at the child’s rate, generally between 10% and 15%. Any amount over $2,100 is then taxed at the custodian’s higher individual income tax rate, according to the most recent information from the IRS.
As mentioned previously, it’s best to consult a professional tax advisor to walk you through this process.
A custodial account counts as an asset for the beneficiary, and can affect the ability of your child to get financial aid, potentially reducing the amount of assistance they receive.
Like any investment account that holds stocks, bonds, mutual funds and other securities, the value can rise and fall depending on market conditions.