Things to know about the custodial account

There are various reasons pertaining to which you might have decided to open up a custodial account for your children. It is either you want to make their future bright, save up for college, or making sure that your little ones don’t ever have to worry about anything they need in the future. A custodial account generally refers to a saving account that is opened in a financial institution such as a bank, mutual fund company, or brokerage firm. To answer the question what is the best custodial account out there? The answer is that you will have to decide it for yourself and in order to make your decision easier you must understand the following things or elements about the custodial account;

  • That money isn’t yours anymore

When you have decided to open up a custodial account and have started transferring the finances there, that money now belongs to the child. While you as a parent can act as the custodian or manager of the account but that money can only be used for the betterment of the child. So, in legal terms, the parents themselves are forbidden to use the money for their personal use or engaging in expenditures that don’t directly point to the betterment of the child’s future.

  • Kids gain control when they are young

The only legal statement that can better explain the scenario is that when your invest for kids ceases to be the minor only then they can have full custody of the money being deposited into the custodian account of yours. According to the different states and a harmonious change in rules and regulations it is expected to happen somewhere at an age of 18-21.

  • The kid may have to file tax returns and pay taxes

Yes, that is right. Although any income from the child’s custodial account most definitely belongs to the child, if that income exceeds a particular amount then suitable tax needs to be paid by the kid. In general reference to this, you might have to thoroughly check out the rules and regulations as listed for the kiddie tax rules as that will best explain the scenario and overall tax that you or your child would have to pay.

  • Gift tax consequences

You can now move up to $14K in your child’s custodial account as a gift tax exclusion and no tax would be deducted on that money as it is provided to your child from you as a gift. Your spouse can do the same and it can be done for each and every child that has a separate custodial account. But if you choose to transfer more than $14K then you can no longer subject it to the gift money and would have to pay demandable tax on this money.

But if that tax doesn’t apply to you then according to the kiddie tax rules your child would have to pay the tax for that money as it no longer classifies as gift money and it is present in the custodial account of the young ones, so rules and regulations would apply.