Saving in Custodial Accounts

by | Feb 14, 2023

Saving in Custodial Accounts 

There are many ways to save for your children and grandchildren’s future expenses, including education. One option is to save into a custodial account that benefits the child. 

What is a Custodial Account? 

A custodial account is really an investment account created by a parent or grandparent for the benefit of a minor child or grandchild. When you contribute money into a custodial account, you make a gift to the child or grandchild beneficiary of the account. You, as the custodian, control the account until the minor reaches the age of majority. This can be either age 18 or 21, depending on the State the account was set up in. On reaching the age of majority, the beneficiary assumes control of the account. In Connecticut, the age of majority when beneficiaries assume control of their custodial accounts is 21. 

What entities offer Custodial Accounts? 

Custodial accounts are governed by Federal rules under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). A UGMA or UTMA account can be opened at any financial institution. In Connecticut, only UTMA custodial accounts can be opened. 

Benefits of Custodial Accounts 

Once funds are gifted to the custodial account, the assets irrevocably belong to the beneficiary child. The custodian can invest the funds to grow over the long term. The custodian can withdraw funds for the benefit of the minor child. It is probably best to use this account as a saving vehicle for the child’s future larger expenses such as education. It is probably not a good idea to use it, for example, for everyday living expenses. 

When the child attains the age of majority and assumes control of the custodial account, it is a good way for the parent or grandparent to educate the child on the benefits of saving and long-term investing. For the child, owning an investment account is a wonderful gift from a parent or grandparent to start the child on a good path to building and growing a nest egg. 

Gifting and Tax rules 

Gifts to custodial accounts follow the Federal and State gift tax rules. You are allowed to gift up to the annual gift exclusion amount without using up your lifetime gift tax exclusion amount. The annual gift exclusion amount is $16,000 for 2022. 

One aspect to keep in mind is that assets in a Custodial Account could limit a child’s eligibility to obtain financial aid for college. 

Also, certain tax rules apply to investment income of the account. Consult with your tax professional for specific tax rules that apply to custodial accounts. 

How does it work? 

A parent or grandparent can open a UTMA custodial account with most financial institutions. Factors to consider when choosing where to open a custodial account include account fees, minimum deposit amounts. Also, consider the available investment options each account offers, as well as the fees and other expenses charged. Additionally, make sure that the financial institution has a good reputation and a proven track record. 

Consult with Kreitler Financial on how to save into a custodial account.