Custodial Users and Accounts (2024)

FAQs

What are examples of custodial accounts? ›

The most common example of a custodial account is one set up for a minor by a legal guardian. A parent or guardian wants to make sure their dependent or child has money saved for when they become a legal adult. They can make contributions to the account in set time intervals and adjust the investments to watch it grow.

Unlike 529 plans and ESAs, custodial accounts are subject to the so-called "kiddie tax." This tax rule applies to unearned income (i.e., investment income) up to a certain threshold. Over that threshold, the child will pay taxes at the parent's tax rate.

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.

There are advantages, including tax advantages, for custodial accounts compared to noncustodial accounts. There are also downsides, including the risk that the account will limit the amount the child can receive in financial aid from a college because the account is considered an asset owned by the minor.

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.

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).

As the custodian, you can only withdraw funds for the benefit of the minor. This includes expenses related to education, healthcare, or other necessary expenses. However, you cannot use the funds for personal expenses or anything that does not directly benefit the minor.

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.

Is UTMA better than 529? ›

From a tax perspective, 529 plans are also generally better. Earnings in a 529 plan are tax-free as long as you use them for qualified education expenses. By contrast, the government taxes UTMA earnings above $2,100 like income from a trust or estate. This could mean a big tax bill.

UTMA accounts have no withdrawal limits. However, UTMA withdrawal rules set out that the funds belong to the minor from the moment of transfer, so the funds can only be used for the direct benefit of the minor. Can parents take money out of UTMA accounts? Yes, but only for purposes related to the minor.

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.

A custodial account is typically a savings account that an adult controls for a minor. However, custodial accounts are technically any type of financial account that is opened on behalf of someone else—typically a minor—and managed by someone over the age of 18.

Examples include: The government is the treasurer for another government or acting as their bank. The government is on the bank account. Any asset the government is holding for another government and the holding government is not using the asset for their own operations.

There are different types of custody, which impact how you and your co-parent will share parenting time and decision making for your children after divorce or separation. The major types include physical, legal, sole, and joint custody. The best options depend on your family's circ*mstances and your child's needs.

Some of the better-known U.S. banks are custodian institutions, and include JP Morgan, Mellon, Bank of New York, Chase, Citigroup, and State Street. Overseas, the best-known custodian banks include BNP Paribas (France), Barclays (England), Deutsche Bank (Germany), UBS and Credit Suisse (Switzerland).