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If you’ve ever thought about starting an investment account for your child or purchasing real estate in their name as part of a long-term financial plan, you’ve probably come across the term ‘custodial account’ before.
If the phrase scared you away from actually looking further into your plans, you shouldn’t let it. In actuality, setting one up can may be as simple as talking to someone at your bank for help.
Before you get started, it’s good to be a bit familiar with the ins and outs of custodial accounts. For starters, there are two different types.
- Uniform Gift to Minors Act (UGMA) accounts: These types of accounts are good for investing in securities and can usually be transferred fully over to your child when they turn 18 (although the exact age will be set by your state).
- Uniform Transfer to Minors Act (UTMA) accounts: Also good for securities, the UTMA accounts can also be useful for real estate, and typically transfer to your child at around 21 years of age.
There will be certain tax restrictions that come with opening these types of accounts, as well. For example, of the three parties involved (donors, custodians and minors), there can be multiple donors on a single account, but each will only be eligible to contribute up to $14,000 a year before they begin to incur a gift tax. (Keep in mind that in this case, donors and custodians can be, and usually are, the same person.)
Of course there are some circumstances where you’ll want to shy away from opening a custodial account. If you’re interested in learning more about these types of accounts and when it’s best to use them, check out this piece for more information.