Kids grow up fast, but strong investments take some time. Custodial accounts for kids allow an adult to oversee a special savings account although it’s placed under the name of the child. An adult can invest on behalf of a child and prepare for their future. This opportunity offers protection for the child by ensuring the investments remain in the account. Investing for kids provides numerous possibilities by allowing the investment to continue growing or adding to a potential college fund. A custodial account can help open the doors and provide more possibilities for the future.
Quick Look at the Best Custodial Accounts for Kids:
1. Charles Schwab
The custodial account from Charles Schwab Corp. (NYSE: SCHW) provides flexibility and requires no minimum deposit to open an account that requires no maintenance fees. In addition, it does not limit how much you can contribute. This account offers stocks and exchange-traded funds (ETFs) online without heavy commission fees. The amount of flexibility and helpfulness provided by the account appeals to new investors because Charles Schwab offers additional educational tools such as research. However, trading cryptocurrency is not allowed.
A Fidelity Youth account makes it easier for kids to invest, while giving parents the opportunity to manage the account, support their children and help them learn more about money and finances.
When your kids use a Fidelity Youth account, they get:
- No account fees or minimums to open
- Saving with as little as $1
- The option to purchase fractional shares
- A powerful mobile app
- Financial education tools for the whole family
If parents want to teach their kids to be responsible with money, Fidelity is a good place to start. Plus, this might be a way for parents to educate themselves while giving their kids better financial opportunities earlier in life.
3. TD Ameritrade
With no required minimum account balance to begin investing, TD Ameritrade offers a higher level of customer service that combines well with a generous amount of provided research. In addition, TD Ameritrade offers a wide and varied range of possible investments. Trades executed online on stocks and ETFs are commission-free, but the platform does not offer fractional shares.
4. Ally Bank
Ally Bank offers an online savings account that requires no minimum balance and charges low fees. The account includes helpful organizational tools to help ease the task of research. The custodial account can be invested into a wide range of stocks and ETFs that offer select commission-free trades. However, mutual funds are subject to fees. As a completely virtual bank, Ally has no physical branches to visit in person. If you have a question or concern, then you will need to go online instead of in person for assistance.
UNest makes investing for kids simple with a streamlined process and unique asset classes. UNest charges a flat fee of $5.99 per month, allowing you to customize your investing to the needs of your family. Open a Regular account when you have one child and move up to a Family account when you have several children (up to 5).
Parents and any other adults who wish to contribute may do so at any time, and there are 5 options for investing:
- Conservative, investing in fixed income and bond ETFs
- Aged based Conservative, Moderate or Aggressive investing, each with a mix of fixed income and equity ETFs
- Socially-conscious Conservative, Moderate or Aggressive investing, each with a mix of socially-conscious equity and fixed income ETFs
- Aggressive, investing 100% in Vanguard equity ETFs
Up to $2,200 in annual earnings grow in a tax advantaged manner and kids can earn tens of thousands of dollars more over the life of the account using this method. Kids can access these funds when they reach the age of majority, and those funds can be used for any purpose, making UNest simple and powerful for the family.
Advantages of Custodial Accounts for Kids
Custodial accounts offer a wide range of benefits that can make them more appealing to an investor than traditional savings accounts.
Before opening an account, consider the different available account options. The two standard types of custodial accounts are the Uniformed Gift to Minors Act (UGMA) and the Uniformed Transfer to Minors Act (UTMA). The UGMA is a type of brokerage account to which any person can contribute gifts. UGMAs accept a wide range of financial gifts that span from money to bonds. In contrast, UTMAs allow for gifts such as money and real estate while also being more complicated and stricter in general because of the nature of allowed items.
Overall, custodial accounts can prove beneficial given their flexibility in both the financial amount of allowed investments and investment types. In addition, the accounts offer a clear directive on who will receive and benefit from the investments, which provides a certain level of clarity and protection for the investments in the long run. It’s important to understand that many of the advantages of a custodial account are best seen through the lens of long-term investing and protecting a child’s financial future.
Tax advantages: Custodial accounts offer a wide range of tax advantages. One benefit of this specific account is that earnings are taxed but at the child’s tax rate because the earnings are viewed as belonging to the child of the account.
Flexibility: The accounts provide flexibility because they often require no minimum or maximum contribution. A custodial account can continue growing and earning potential interest from investments. However, it’s important to keep in mind potential taxes and future financial aid for college when making donations to the account. In terms of financial aid for college, federal financial aid algorithms and award mechanisms consider your child’s custodial account and perceive part or all of the custodial account as a valid payment option for college.
Clear beneficiary: With a custodial account, there is no confusion about a beneficiary when the child is a minor because the entire point of the account is for all investments to belong to the specified child in the future. In addition, having a clear beneficiary also protects the child because it makes the contents inaccessible to other people or entities.
Varied investment options: Custodial accounts allow for a wide range of acceptable financial investments. Before creating an account, check to understand what specific account types are allowed. For example, Charles Schwab does not allow cryptocurrency while TD Ameritrade does not allow fractional shares. Overall, custodial accounts accept varied financial investments that can range from real estate, money and stock. However, when investing in a custodial account, it’s important to consider the level of risk and exposure that certain investments offer.
Drawbacks of Custodial Accounts
Custodial accounts include certain restrictions and limitations that might create complications if not properly understood. While custodial accounts offer tax advantages, they can still incur tax. tIn addition, custodial account investments are irrevocable and have little to no stipulations on how the investments should be spent once the child reaches the age of majority.
Irrevocable: Investments placed into a custodial account are irrevocable. Once the real estate or money is placed into the custodial account, it cannot be removed until the child comes of age. Although the move can offer benefits, it can also become a constraint because of the finality of the terms. Such a strict and permanent investment might hinder an investor that’s more interested in creating short-term profits for a child.
No withdrawal or spending limitations: A possible drawback of a custodial account stems from its lack of spending limits because it contains no rules or regulations to require the beneficiary to slowly and wisely withdraw funds. Once a child reaches the age of majority, they can withdraw and use funds as they deem fit.
Custodial Accounts vs. Trusts
Typically, a custodial account is much simpler to use than a trust. A trust tends to be more expensive because of additional fees and legal expenses and is more time-consuming. Trusts are similar to custodial funds because they offer legal protection for the assets involved as well as possible tax benefits.
Trusts differ from custodial accounts because a trust has the option to stipulate how the assets can be used. Even though the assets belong to the beneficiary, trusts can specify guidelines on how the assets can and are intended to be used. While a trust can be beneficial if there is a larger sum of money involved, a custodial account is likely a more accessible alternative for relatively smaller amounts of funds.
Teach Your Kids About Wise Spending
There was a time when opening a bank account for kids was difficult. Parents pulled together change and aded a few dollars, went to the bank and got started. These days, kids can manage money using something like the Greenlight Debit Card. As a parent, you can register for a Greenlght card, give it to your child and deposit money as needed.
Your child(ren) use the card just like any other debit card, and they can easily access their allowance, money they earned through a job or take payments for babysitting, etc. Greenlight also features budgeting and financial education resources. Kids learn how to do more than just deposit and spend money. Parents never need to worry about lost cash, and kids have just as much spending power as adults.
Frequently Asked Questions
When does a custodial account end?
Custodial accounts in different states end at different times. The main reason for the discrepancy comes from each state having its own definition and perception of when a person becomes an adult. Custodial accounts usually end when a person reaches the age of majority, which is typically between the ages of 18 and 25. The age of majority defines when a person becomes legally recognized as an adult. Once a person reaches the appropriate age, then the money becomes payable and accessible to the mature child.
Do custodial accounts require distributions?
No. Custodial accounts do not require distributions. The assets are placed into the custodial account and only become accessible to the minor once they have reached the age of majority. To better protect the child, the gifts placed into the account cannot be taken out or reversed. The money placed into the custodial account becomes the child’s money and cannot be removed by another person.
What are the best custodial accounts for kids?
Benzinga offers a list of the best custodial accounts for kids in the above article.