Introduction
As a parent, you want to provide the best for your child. This includes securing their financial future. One way to do this is by opening a custodial account for them. This type of account allows you to save money for your child’s future expenses, like college tuition or a down payment on a home.
What is a Custodial Account?
A custodial account is a savings or investment account that is managed by a parent or guardian on behalf of a minor. The account is opened in the child’s name, but the parent or guardian has control over the account until the child reaches the age of majority, which is usually 18 or 21.
Types of Custodial Accounts
Uniform Gifts to Minors Act (UGMA) Account
A UGMA account is a custodial account that is used to hold assets, like stocks, bonds, and mutual funds, that are given as gifts to a minor. The account is managed by the custodian until the child reaches the age of majority, at which point the assets are transferred to the child.
Uniform Transfers to Minors Act (UTMA) Account
A UTMA account is similar to a UGMA account, but it allows for a wider range of assets, like real estate and artwork, to be held in the account. The account is managed by the custodian until the child reaches the age of majority, at which point the assets are transferred to the child.
Where to Open a Custodial Account
Banks
Many banks offer custodial accounts, and they can be a good option if you want to keep your child’s savings in a secure and easily accessible place. However, the interest rates on these accounts are often low.
Investment Firms
Investment firms, like Fidelity and Schwab, also offer custodial accounts. These accounts offer a wider range of investment options, like stocks and mutual funds, and may have higher interest rates than bank accounts.
Online Brokers
Online brokers, like E*TRADE and TD Ameritrade, also offer custodial accounts. These accounts are similar to those offered by investment firms, but they may have lower fees and minimum balance requirements.
Factors to Consider
Account Fees
When choosing where to open a custodial account, it’s important to consider any fees associated with the account. These may include account maintenance fees, transaction fees, and fees for transferring funds.
Investment Options
If you plan to invest the money in the account, you’ll want to choose an account that offers a wide range of investment options.
Interest Rates
The interest rate on the account will determine how much your money grows over time. Be sure to compare interest rates when choosing where to open a custodial account.
Conclusion
Opening a custodial account is a great way to save for your child’s future. When choosing where to open the account, consider factors like fees, investment options, and interest rates. Whether you choose a bank, investment firm, or online broker, be sure to do your research and choose an account that meets your needs.
