Custodial accounts, also known as UGMA/UTMA accounts, are brokerage accounts that allow parents or guardians to invest on behalf of their children. These accounts are designed to hold assets for minors until they reach the age of majority, typically 18 or 21 years old depending on the state. UTMA and UGMA accounts are both custodial accounts for minors. Funds can be used for more than college-related expenses, like saving for a down payment on a house or starting a business.
When considering how to fund a child's college education, many parents turn to an obvious place, a 529 account. However, 529 accounts have some limitations, such as only being able to use the funds for qualified education expenses. UGMA accounts offer more flexibility in how the funds can be used, but they also have some drawbacks, such as the funds being considered the child's assets for financial aid purposes.
If you want your children to have their own investments, then a custodial brokerage account can be a great solution. These accounts are similar to regular brokerage accounts, but they are set up in the name of the child with a custodian, usually a parent or guardian, managing the account until the child reaches the age of majority. The custodian has control over the account and can make investment decisions on behalf of the child.
For those interested in knowing what the Uniformed Gifts to Minors Act is, also known as UGMA, we have a complete breakdown inside. The UGMA is a federal law that allows a minor to receive gifts, such as cash, securities, and real estate, without the need for a trust or other legal arrangement. The custodian of the UGMA account manages the assets until the child reaches the age of majority.
A minor child may be named on a brokerage account if a parent or guardian opens a custodial account with the child. This allows the minor to receive gifts of securities or other investments that can grow over time.
When you are thinking about saving for your child's future, you may wonder what kind of account would work best. There are several options available, including 529 accounts, UGMA accounts, and custodial brokerage accounts. Each has its own benefits and drawbacks, so it's important to consider your goals and financial situation before making a decision.
The best investment accounts for kids of 2023, including custodial Roth IRAs (best for no age limits), 529 college savings plans (best for education expenses), and UGMA accounts (best for flexibility). Custodial brokerage accounts offer a way to invest on behalf of your child without the restrictions of other types of accounts.
Depositing money into a custodial brokerage account could give your child a head start. By starting early and investing regularly, you can help your child build a nest egg for their future. With the right investments and a long-term approach, your child could have a solid financial foundation by the time they reach adulthood.