how to open a custodial accounthow to open a custodial account

How to Open a Custodial Account: A Step-by-Step Guide

September 6, 2023
Family Finance

Opening a custodial account is an excellent way to invest in your child's future.

By following this step-by-step guide, you can confidently navigate the process.

Starting early and staying consistent can have a tremendous impact on your child's financial future.

Get started today and set your child on the path to financial success!

Up Ahead:

Custodial Accounts: Saving for your Kid's Future

Custodial accounts are special financial accounts that parents or guardians can open for their children.

These accounts are legally owned by the child and managed by an adult until the child reaches the age of majority, typically 18 or 21, depending on the state.

Custodial accounts come in different types, such as brokerage accounts, high-yield savings accounts, or even retirement accounts.

The Importance of Custodial Accounts

Opening a custodial account for your child can provide them with a head start in building their financial future.

It allows you to save and invest money on their behalf.

It provides them with a nest egg that can be used for college, a down payment on a house, or other significant expenses in their adult life.

Minors can't open bank accounts or investment accounts on their own in the US. They need an adult to open an account with them.

Opening a custodial account for your child can provide them with a head start in building their financial future.

Setting up investments for kids is a key method of building generational wealth.

Moreover, custodial accounts offer tax advantages and can teach children about financial responsibility and investing.

Key Characteristics of Custodial Accounts

It's important to understand the key characteristics that make these accounts unique.

Here are some important aspects to keep in mind:

Ownership by the Child: Custodial accounts are legally owned by the child, and they gain full control when they reach the age of majority.

Tax Advantages: Custodial accounts offer potential tax benefits, with a portion of earnings potentially being tax-free due to the child's lower tax bracket.

Transition to Adulthood: When the child reaches the age of majority, the custodial account is transferred to their complete ownership.

Financial Education Opportunity: Custodial accounts can be used as a teaching tool to educate children about finances and investing from an early age.

Gift Tax Considerations: Contributions to custodial accounts may be subject to gift tax rules if contributions exceed the yearly monetary gift tax limit.

Now that you're up to speed on custodial accounts, let's dive into the steps of opening an account.

Custodial accounts can be a great opportunity for friends and family to contribute to your child's financial future. Consider using Greatest Gift's financial gifting platform to allow others to contribute easily.

Step 1: Choose an Account Type

When opening a custodial account, it's essential to choose the right account type.

Different account types align with different financial goals.

Consider what your goals are for your child's savings and investment.

Different account types align with different financial goals.

Financial goals for kids' custodial accounts

Are you looking to set your kid up for retirement?

Grow your child's money for college or a house down payment?

Or just want to start your kid off with some savings?

Here are three common account types to consider:

custodial stock investment account

Custodial Investment Account

A custodial brokerage account, also commonly referred to as a UTMA account, allows you to invest the funds in the custodial account in various securities, such as stocks, bonds, and mutual funds.

Buying stocks for kids can set them on the path to a bright financial future.

This account type offers the potential for higher returns but also carries some level of risk.

Benefits of custodial investment accounts:

  • Potential for Growth:
    By investing in stocks or mutual funds, you give your child's savings the opportunity to grow significantly over the long term, potentially outpacing inflation and generating substantial returns.
  • Exposure to Market Dynamics:
    Managing an investment account can teach your child valuable lessons about the stock market, the importance of diversification, and the concept of risk versus reward.
  • Long-Term Investing Mindset:
    Through this account type, children can learn the significance of investing for the future and develop a mindset focused on long-term financial goals.
savings account

High-Yield Savings Account

A high-yield savings account is a safer option for those seeking a more conservative approach.

It offers a competitive interest rate, ensuring that your child's savings grow steadily over time while minimizing risk.

Benefits of HISAs:

  • Encourages Saving and Financial Discipline:
    Having a dedicated high-yield savings account for your child can instill the habit of saving money from an early age.
    They can learn the importance of setting aside a portion of their income for future needs and goals.
  • Building an Emergency Fund:
    As your child grows older, the funds in their high-yield savings account can be used to establish their own emergency fund.
  • Developing Financial Responsibility:
    Managing a savings account teaches children about responsible money management, such as budgeting and setting savings goals.

Savings accounts can set a strong foundation for financial well-being as kids transition into adulthood.

Custodial retirement accounts

Custodial Retirement Accounts

Consider opening a retirement custodial account, such as an Individual Retirement Account (IRA) or Roth IRA, to give your child a head start on retirement savings.

Contributions to these accounts can grow tax-deferred or tax-free, providing long-term benefits for your child's financial future.

Benefits for setting up retirement accounts for your kids:

  • Parental Control and Guidance: Some parents prefer retirement custodial accounts because they offer a level of control over how the funds will be used.
    Since these accounts are locked until retirement, parents can have peace of mind knowing that the money won't be spent by a minor becoming an adult and coming into sudden wealth.
  • Promotes Long-Term Financial Planning:
    By introducing retirement savings at an early age, you instill the importance of long-term financial planning and encourage your child to develop a habit of regularly contributing to their retirement account.
  • Tax Advantages for Growing Savings:
    Retirement custodial accounts offer potential tax benefits, either through tax-deductible contributions (traditional IRA) or tax-free growth and withdrawals (Roth IRA).

Choosing the right account type for your custodial account depends on your financial goals and risk tolerance.

Consider your preferences and objectives when selecting the account type for your child's custodial account.

Next, we'll guide you through the process of choosing a provider for your custodial account.

Step 2: Choose a Provider

When it comes to choosing a provider for your custodial account, it's important to make an informed decision.

If you already have a banking or investment relationship with a reputable financial institution, it's worth considering opening the custodial account with them.

This can provide you with the convenience of managing your accounts in one place.

There are a number of custodial account providers available to choose from

If you don't have an investment or banking relationship, there are a number of custodial account providers available to choose from.

Explore our guide to the top savings accounts for kids to find our favorite providers.

Here are key factors to consider that will help you find the right custodial account provider:

Reputation, Trustworthiness, and Insurance

Look for a well-established financial institution that has a solid reputation for managing custodial accounts.

It's important to choose a provider that you can trust with your child's financial future.

Consider checking if the institution offers insurances like the Federal Deposit Insurance Corporation (FDIC) for banks or the Securities Investor Protection Corporation (SIPC) for brokerage accounts.

Institutional insurance provides added protection and peace of mind.

Account Features

Evaluate the account features offered by potential providers.

Look for user-friendly online account management tools that make it convenient for you to manage the account.

Consider the level of customer support provided.

It's comforting to know that if you have any questions, you can rely on responsive customer support.

Investment Options

Consider the investment options available within the custodial account.

Look for a provider that offers a diverse range of investment options suitable for your investment goals and risk tolerance.

Having access to a variety of investments allows you to customize your child's portfolio and potentially achieve higher returns over the long term.

Account Minimums and Fees

Take into account any minimum deposit requirements or ongoing balance thresholds set by the provider.

Review the fee structure, including account maintenance fees, transaction fees, and any other charges associated with the account.

It's important to understand the costs involved to ensure that they are reasonable and won't eat into your child's savings.

Now that you know the account type and provider of choice, it's time to open your account.

Step 3: Open the Account

Opening an account with a bank or brokerage is easy and can be accomplished in a matter of minutes.

Gather Required Documents and Information:

Your personal identification information, including your Social Security Number (SSN), address, and date of birth.

The child's identification information, including the SSN or Taxpayer Identification Number (TIN), date of birth, and legal name.

Next, you have two options for opening a custodial account:

Option 1: Open an Account Online

Many custodial account providers offer the convenience of opening an account online.

Visit the provider's website and look for the "Open an Account" or "Get Started" button.

Follow the prompts, provide the required information and documents, and submit your application electronically.

Be sure to review and understand the fees and terms & conditions before proceeding.

Option 2: Visit a Physical Location

Some providers may ask you to bring your child with you to open the account.

If this is the case, or if you prefer a more personal approach, you can visit a physical location.

Find a branch or office nearest to you and bring the required documents with you.

A representative will guide you through the account opening process, help you complete the necessary paperwork, and answer any questions you may have.

Complete the Account Opening Process:

Regardless of the method you choose, you will need to provide the necessary information, including your identification details and the child's information.

Additionally, you may need to review and sign relevant account agreements and disclosures.

Step 4: Fund the Account

The final step is to fund your account.

Funding your custodial account is a crucial step towards building your child's financial future.

Here's how to fund your custodial account:

Deposit funds

Deposit Funds

Transfer money from your linked bank account or write a check payable to the custodial account.

If you chose a savings account, you don't need to take any further actions.

Allocate Funds

If you've chosen an investment-based custodial account, such as a UTMA or retirement account, you need to use the funds to purchase securities.

Consult with your chosen brokerage firm to select suitable investments based on your risk tolerance and long-term objectives.

To maximize the growth of your child's account, make regular contributions

Make Regular Contributions

To maximize the growth of your child's account, make regular contributions.

Set up automatic transfers from your bank account or contribute periodically to the custodial account.

This consistent saving habit can help your child's savings grow steadily over time.

Next Steps

Monitor Progress

It's important to monitor the account's progress periodically.

Review the account statements and track the performance of your investments.

Make adjustments if necessary to keep your child's financial goals on track.

Tax Reporting

It's essential to be aware of the tax implications of custodial accounts.

As the custodian, you'll be responsible for reporting any taxable income generated by the account on your tax returns.

Financial gifts for kids

Contributions and Gifts

Custodial accounts can be a great opportunity for friends and family to contribute to your child's financial future.

Consider using Greatest Gift's financial gifting platform to allow others to contribute easily.

Teaching Your Kids About Saving and Investing

Use the custodial account as a teaching tool to educate your child about the importance of saving and investing.

Involve them in discussions about financial goals, investment decisions, and the power of compounding.

This hands-on experience will help them develop essential money management skills.

Transferring the Account to Your Child

The custodial account ownership is transferred to your child when your child reaches the age of majority, typically 18 or 21, depending on the state and the account type.

Your child gains full control over the account and can use the funds as they see fit.

This transition marks an important milestone in their financial journey.

Frequently Asked Questions

How much money do I need to start a custodial account?

The minimum deposit requirements vary among providers.

Some may allow you to start with as little as $25 or even less, while others might require a larger initial deposit.

Fidelity offers custodial investment accounts with no minimums.

Can I open a custodial account at any bank?

Many banks offer custodial accounts, but it's essential to check with the specific bank regarding their account offerings and requirements.

Consider factors such as fees, account features, and reputation when choosing a bank.

One example is Capital One, that offers a popular custodial savings account for kids that you can open as soon as they are born.

Do you need a Social Security Number (SSN) to open a custodial account?

Yes, you will generally need your child's Social Security Number (SSN) or Taxpayer Identification Number (TIN) to open a custodial account.

These numbers help establish the child's identity and ensure compliance with tax regulations.

Can I open a custodial account for my 2-year-old?

Yes, custodial accounts can be opened for children of any age.

However, some providers may have age restrictions for certain account types.

Capital One's savings account can be opened as soon as a child has a social security number.

What happens to a custodial account when the minor turns 18?

When the child reaches the age of majority, the custodial account ownership is transferred to them, and they gain full control of the account.

They can use the funds for any purpose, and you no longer have any legal authority over the account.

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