Custodial accounts may be an ideal investment vehicle to use for a child’s expenses prior to or after college. While there are no requirements that the money be used for education, any withdrawals from a custodial account must be used for the child’s benefit outside the normal cost of care.
Custodial accounts are established under the Uniform Transfers to Minors Act (UTMA).
Consider a Custodial Account if:
- You might want to use the money for your child’s expenses prior to or after college.
- Your child may not be applying for needs-based financial aid or you are planning to save more than $2,000 per child per year.
- You don’t mind handing over control of the account to your child when the time comes.
- You want to use your annual gift tax exclusion to gift money to your child.
Is a Custodial Account right for you?
Almost anyone is eligible to open a custodial account for a child, whether it's a parent, grandparent, relative or friend.
The child owns the money, but the adult (custodian) manages it until the child takes control of the assets when the child reaches adulthood.
Tax features and investments
What are the tax features?
Custodial accounts are not tax-deferred and taxation of earnings from the account will depend on the minor's tax status, income and age. Generally, any realized gains or losses are taxable in the year the transaction occurs. For example, any distributions of dividends and capital gains are taxable whether they are paid to you in cash or reinvested to purchase more shares. In addition, for any sale (withdraw) or exchange, the gains are taxable.
| Tax Year 2023 and 2024 Custodial Account Tax Rates | ||
|---|---|---|
| Yearly Income (earned and unearned)* | ||
| Child's Age | Amount of Income | Applicable Federal Tax Rate |
| Under 19 years (or if full-time student, under age 24) | Earned Income (any amount) | Child's tax rate |
| $0 to $1,150 in 2023 and $1,250 in 2024 unearned income only | Tax free if the child has no earned income | |
| $1,150 - $2,300 in 2023 and $1,250 - $2,500 unearned income only | ||
| Above $2,300 in 2023 and $2,500 in 2024 unearned income only | Parent's marginal tax rate if child has no earned income | |
| 19 years and over (or if full-time student, age 24) | All earned and unearned income | Child's tax rate |
* Earned income refers to wage earnings and unearned income refers to interest, dividends, capital gains and other earnings from investments. Refer to IRS Publication 929 or a tax advisor for additional information.
How much can I invest?
With a custodial account you can invest as much as you want. There are no limits on the amount you can put aside to save for your future needs. Keep in mind however, that if you are a parent gifting to a custodial account, any contributions over the gift tax exclusion ($17,000 for 2023 and $18,000 for 2024) may be subject to gift tax.
What are the investment minimums?
The minimum initial investment to open a custodial account at Janus Henderson is $100 with an automatic investment of at least $50. If an automatic investment is not established, the minimum initial investment is $1,000. Subsequent one-time purchases must be at least $50.
Are there any investment deadlines?
No, you may add to the investment at any time.
However, it is good to be aware of when the child reaches the age of termination, which is often between 18 and 21, depending on the state. After that time, the account owner (the child who is now an adult) may take ownership of the account by transferring funds to an account type of their choosing.
What are the fees for a custodial account?
There is no cost to open an account and no annual maintenance fees when account minimum thresholds are met.
Withdrawals and helpful information
How do I request an account withdrawal?
Depending on the account options you have selected, the custodial adult may redeem shares by telephone, online or in writing.
Only the custodian can request withdrawals and manage the account until the child takes ownership. Redemptions can be made at any time, but they must be for the benefit of the child beyond the normal cost of providing for him or her.
After reaching the age of termination, the former child can withdraw money at any time after taking control of the account.
Am I required to take money out of the account?
No, there is no requirement to take money out of the account. However, any money taken from the account is to be used for the sole benefit of the minor.
When does the former minor take possession of the account?
The custodian’s control of a Transfers to Minors Act (UTMA) account terminates once the minor reaches the legal age of termination (usually between the ages of 18 and 21) as determined by the laws of the state of governance under which the account was established. At this time, the custodial account needs to be transferred (there are no tax consequences) into a taxable non-retirement account for the former minor, who then becomes the full owner and decision-maker.
What other information might be helpful to know?
Since custodial accounts are considered the assets of the child, assets in this type of account can negatively impact qualification for federal financial aid for college. Because important tax and legal issues may be involved, we suggest consulting a tax or legal adviser before opening this type of account to determine what would be best for your individual situation.
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Open a Custodial Account
Saving for your child’s future may be one of the most important investments you’ll ever make. Taking action now can help ensure your child, grandchild or dependent has a strong financial foundation for the long road ahead.