Custodial Account | Plan For A Child's Future | Fidelity Investments (2024)

FAQs

Should I open a custodial investment account for my child? ›

Give a gift to a child—and introduce investing skills early.

A custodial account can be an excellent way to make a financial gift to a child—whether your own, a relative's, or a friend's.

A custodial account is generally created by a parent or grandparent for the benefit of a minor child or grandchild. When you put money into a custodial account, you make a gift to the minor beneficiary of the account, even though the minor does not control the account.

You can control how the money is invested with many choices available to you while your child is still a minor. You also have flexibility in terms of how the money is spent as long as it's used for the benefit of the child. The drawbacks: You can't change the beneficiary of a custodial account once it's established.

A portion (up to $1,250 in 2024) of any earnings from a custodial account may be exempt from federal income tax, and a portion (up to $1,250 in 2024) of any earnings in excess of the exempt amount may be taxed at the child's tax rate, which is generally lower than the parent's tax rate.

Disadvantages of Custodial Accounts

Any deposits or gifts made to the account are irrevocable, meaning they can't be changed or reversed. All the account's holdings pass, irrevocably, to the minor at the age of majority.

Gifts are irrevocable: Contributions to a custodial account are considered irrevocable—meaning you can't get that money back—and funds can be withdrawn by the custodian only to pay for expenses that would directly benefit the child before the age of majority.

The named beneficiary (i.e., the minor for whose benefit the account is created) is the owner of the account. In other words, the money or assets in the UTMA account belong to the beneficiary (i.e., the child).

Key takeaways: A 529 savings plan is a tax-advantaged investment account that can help families pay for educational expenses. But there are limits on how you can use the money. Custodial accounts offer beneficiaries greater spending discretion, but there are fewer tax breaks.

Why you should invest in your child's future? ›

In fact, as soon as a child is born, parents start worrying about the future. Whether there will be enough to provide for the child's growing up years, and more importantly, education and marriage. For parents, education is not an expense but an investment that will provide their child career growth and opportunities.

There are two main types of custodial accounts: the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). The largest difference between the UGMA and UTMA is that the UTMA covers more assets. For instance, with a UGMA account, you can include assets such as stock, bonds, and mutual funds.

Uniform Gifts to Minors Act accounts, or UGMAs, allow minors to hold financial assets like stocks, bonds, index funds, certificates of deposit, cash and insurance policies, while Uniform Transfer to Minors Act accounts, or UTMAs, go beyond traditional assets and allow minors to hold asset classes like real estate or ...

Tax Limitations: Custodial accounts have some tax advantages (and no penalties), but 529 plans offer more tax savings overall. Gifts Are Irrevocable: There are no takebacks—even if you need the money or want other children to share in the account assets.

If your child has a summer or after-school job, you might consider opening a Roth IRA for kids on their behalf. With such an account, your teen can see firsthand how retirement accounts work, while they take advantage of the benefits of saving early in life.

Depending on the state, a UTMA account is handed over to a child when they reach either age 18 or age 21. In some jurisdictions, at age 18 a UTMA account can only be handed over with the custodian's permission, and at 21 is transferred automatically.