A custodial account can be a simple route to a future goal. Custodial accounts let parents, grandparents, and others transfer and invest money for a minor. The accounts offer tax benefits and the flexibility to use funds for educational or non-educational expenses.
What is a custodial account?
This simple way to transfer property to a minor is called a Uniform Transfer to Minors (UTMA) or Uniform Gift to Minors (UGMA) depending in which state the minor resides.
Contribution age limits
Generally up to age of majority (18 – 21) for your state
Maximum yearly contribution per student
No limit. Up to $14,000 can be treated as a gift for gift-tax purposes
Minimum initial investment
Varies by account from $0 to $100,000
Taxation of earnings and withdrawals
Earnings are taxable, typically at the minor’s tax rate
Funds must be used for the benefit of the minor at any time
Penalties for non-qualified withdrawals
Ownership of assets (for financial aid)
Transfers from adult custodian to minor at age of majority
Commissions and fees
Vary by account
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Custodial accounts, known as Uniform Transfer to Minors (UTMA) or Uniform Gift to Minors (UGMA) are different from college savings accounts. Learn more from our comparison table.
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For children younger than age 19 (or 24 for a full-time student), the first $1,000 of earnings qualifies for the standard deduction. The next $1,000 in earnings is taxed at the minor’s tax rate. If the dependent child’s account earns more than $2,000, the excess is taxed at the higher of the parents’ top marginal rate or the child’s own rate. These “kiddie tax” rules do not affect children who are 18 or older and provide more than half of their own support (based on their own earned income).
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