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How To Open A Custodial Account

by Aamir Ansari
September 3, 2020
in Business
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How To Open A Custodial Account
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Start saving some money on a monthly basis for your kids’ future is very important in the 21st century. This money can help you in the future when your children join the college or university and also in any urgency. But the first question that came to every parent mind is where to save the money and if in the bank then what kind of account should we create. If you are looking for easy to set up and flexible accounts then our recommendation is you should open a Custodial account. For your ease, we are going to share steps in this article to create a custodial account easily. But before you create the account scroll down and learn a little about what is custodial account and types of accounts.

Table of Contents

  • What is a Custodial Account?
  • Types of Custodial Accounts
    • 1. Uniform Transfers to Minors Act Account (UTMA)
    • 2. Uniform Gift to Minors Act Account (UGMA)
  • How to Open Custodial Account?
  • Advantages of Custodial Account
  • Disadvantages of Custodial Account
  • Conclusion

What is a Custodial Account?

A financial account which is set up at a mutual fund company, banks, or a brokerage with the name of a minor and managed by parents, legal guardian, or any relative. This is the best way for your kids’ future that you can create a custodial account and can save money for their studies or anything. It gives you the opportunity to save and invest for your children until they reach adulthood.

The minor for this account varies from state to state but in most states, the age of minor should be between 18 to 21. From childhood to the age of majority the account is managed by parents but when children reach the “age of majority” according to their state, the get complete hold on the account and can do whatever they like to do with the account.

Types of Custodial Accounts

There are two types of custodial accounts from which you should create one according to your financial needs and goals. Choosing the right one is very important as your goals and needs should match the account you are creating. There are two types of Uniform Transfers to Minors Act account (UTMA) and Uniform Gift to Minors Act account (UGMA). Below are the details of these account types.

1. Uniform Transfers to Minors Act Account (UTMA)

This type of account allows you to keep any kind of assets, the ones which you might not expect like real estate and artworks. There is also no limit on the account cap like you can save any amount in the account from small to big. Second advantage of this account type is you can easily transfer the assets to the minor. If the custodian dies, the account will be named as “coming to age” so the child comes to the age of 18 to 21 depending on the state. You should consult with your local lawyer as this UTMA account is not available in many states.

2. Uniform Gift to Minors Act Account (UGMA)

UGMA account has less flexibility as compared to UTMA when it comes to putting the assets in an account. In UGMA, the limitations are present which means you can only keep cash, different types of securities, or insurance policies as assets in the account. In the UGMA policy, a child of 18 age is considered to be an adult and can use his/her account independently. You can easily open a UGMA account in any of the U.S. states.

How to Open Custodial Account?

You can easily create a custodial account through brokerage, financial institutes, banks, or companies. You can try Robinhood custodial account to create any type of account from UGMA or UTMA. They allow both but it depends on your state you are living in so check it before creating an account.

To open an account you must choose one type of account from UGMA or UTMA while signing up. While registration, you should keep your information ready and also the minor information including Social Security Number.

Advantages of Custodial Account

  • There are many advantages of opening a custodial account, few of them are discussed here:
  • You can contribute as much asset as you can there are no limitations.
  • There is no income limitation in any of the Custodial account types.
  • Ease of transfer the assets to the minor without any issues.
  • Best way to avoid estate taxes.
  • A perfect way to give the gift to your children.

Disadvantages of Custodial Account

  • While there are many advantages to the custodial account, there are a few disadvantages also which you should keep in mind.
  • The amount you have contributed to the account is no longer yours as it is for minor now.
  • At First, the deposit of $1,050 is tax-free but after this amount, a little tax is applied which you have to pay.
  • Once the child reaches the age of majority, you will completely lose your control on the account.

Conclusion

Custodial Account is important as it keeps you relax when your children go to college or university. It has more advantages than disadvantages which is very good as it will not stress you. We have discussed the types of accounts and how to set up it so you can easily open a custodial account. If you have any question please feel free to ask in the comments section.

Tags: custodial accountentrepreneursentrepreneursbreakhow to make a custodial accountHow To Open A Custodial Accountmake a custodial accountopen a custodial account
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