Custodial Account Rules:  Bank & Brokerage Accounts for Children

One of the most important decisions that parents make is creating custodial accounts for their children. Custodial accounts are a type of account where one person, usually a parent, has control over the funds while another party gains access to them as they become an adult.

What is a Custodial Account?

A standard custodial bank account only allows for simple interest earnings while a custodial brokerage account allows for this as well as the ability to invest in assets like stocks, bonds, mutual funds, exchange-traded funds (ETFs) and more.

How Does a Custodial Account Work?

Once you open a custodial account, they work like any other account held with a bank or brokerage firm. Two main roles exist for custodial brokerage accounts: 1. The custodian 2. The beneficiary

Custodial Account Rules for Adults and Account Owners (Minors)

- Considered the minor’s asset. The gifts made into the account become the property of the minor and cannot return to the contributor.

- Transferred to the minor at a certain age (between 18–25). These assets transfer to the minor at the age of termination, which is often the age of majority in their state of residence unless stated otherwise in the titling of the account.

Custodial Account Rules for Adults and Account Owners (Minors)

- Made with after-tax money, though there are tax benefits. Not as tax-efficient as retirement accounts like Roth IRAs for kids or adults, but the money contributed does enjoy some tax buffer on unearned investment income subject to certain limits.

- A brokerage account for investing. These accounts allow you to invest on behalf of a minor, teaching how to do it, how to assess risk and ultimately how to build wealth to last a lifetime.

Custodial Account Rules for Adults and Account Owners (Minors)

- Withdrawals must be made for the benefit of the minor. Custodians can’t withdraw funds for their own benefit.

- Factored into financial aid eligibility. These assets technically belong to the minor. Therefore, they count toward financial assistance eligibility when applying to college and seeking financial help with paying for college.

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