The best custodial account for your minor child is the savings account associated with a brokerage firm, Mutual Fund Company, or any other financial institution. These accounts are controlled by adults and proper approval is required to conduct transactions for the account.
A custodial account is a savings account that is set up and administered by an adult for their minor child. There are huge flexibilities of this account with no income limits and withdrawal penalties. They are less expensive and simple to establish that any trust fund. Once the account is established, it functions like any other account at a brokerage or bank. Here we have discussed the benefits of the custodial accounts.
Advantages Of Establishing A Custodial Account
There are various advantages of a custodial account. Some of them are mentioned below:
- Manage Your Child’s Money Seamlessly – When children are minor, he/she might not be competent enough to manage their own money. By setting up the best custodial account for your child, you would be able to manage and safeguard their money. You can keep the money owed by the child from the summer internship or the prize money won in a contest.
- Reduction In Income Tax – As the income tax of the custodial account is billed to the child, they pay a lower tax rate than the parent. The taxes are levied as per the child’s tax rate. This is beneficial for the teenagers who fall between the age group of 19-24 years. Though the benefits are not large enough, however, every penny saved is earned.
- Financial Gift – Custodial accounts are a great way to offer a financial gift to your child. If you want your minor child to understand the mechanism of how the savings grow from compound interest or want them to experience the ownership of stocks, you can gift them a custodial account. Even if the dollar amount is less, these accounts serve as the best financial gift for your child.
- Flexibility – Custodial accounts are highly flexible. There are no limits to contribution or income. Even regular distributions are not required. The account holder is free from withdrawal penalties as well. Both the accounts UGMA and UTMA allow the adult to transfer funds and assets to a minor without the requirement to establish a special trust. The custodial accounts are created for the benefit of the minor.
Now, that you know the advantages of a custodial account, you should not delay in setting up one for your child. These custodial accounts are the most convenient ways to manage your child’s money and making them understand the accounts, interests, and trade.