Episode 102: What is a Custodial Account?
Today’s question is: What is a custodial account?
A custodial account is an investment account that you can use to put away money for a minor child.
Taxes on Custodial Accounts
They became very popular in the 1980s when tax rates were high because they can give some degree of tax benefits. Some of the income that’s earned on the account is tax-free and some of it is taxed to the child at, presumably, a lower tax rate than the parents.
As tax rates over the last 40 years have come down and the introduction of 529 savings plans have come about, they’ve become a little bit less popular, but they are still used to this day. In some states, you will see them referred to as a UGMA or UTMA, which stands for Uniform Gift to Minors or Uniform Transfers to Minors.
What Can the Money Be Used For?
Bottom line, you can really use anything from an investment standpoint inside of them and there really are no restrictions on the uses of the money. You don’t have to totally use it for college expenses, it could be used for anything under the sun as long as it’s for the benefit of the minor child.
Another aspect of it is that when the child becomes the age of majority in their state, it technically becomes their money; usually not automatically, but it is their money from a legal standpoint.