A custodial account is simply a financial account that is set up for a minor. This is because a minor has not attained the legal age of majority. The custodian of this account is usually the parent. A custodial account can actually be opened at a bank, brokerage or at a mutual fund where the adult or the parent is the custodian.
Custodial accounts are actually a new concept under finance. They came about 1956 with the aim of letting a common man pass funds over to their children in the future with a relatively low fee in setting up the account.
The logic behind setting up a custodial account is actually very simple: children are young and cannot manage money at that tender age instead they waste it in minor expenses. The custodian (parent of guardian) manages fully the custodian account. He or she determines the required amount to withdrawal from this account and settle down the demands of the minor. Once the minor reaches the maturity date which is; 18, 21 or 25 years depending on the state you are in, all the assets in the custodial account gets transferred to the minor.
The custodian is the one who determines how much to deposit in the custodial account, how much to invest and also how the account earnings will be reinvested in order to bear much profit. The custodian or the parent for that matter should determine the amount to take out of this account and cater for the needs of the child. Remember that this account is set up to help the child not the custodian. The role of the custodian is only to manage the account on behalf of the minor simply because he or she has not attained the maturity age.
In the custodial account, the parent or guardian can deposit either cash money or savings bonds to the account. The amount deposited results to some earnings which the custodian should think of reinvesting in order to bear more earnings. In the United States, the first $850 of the earnings is actually free from tax while the next $850 must have an annual tax at the minor’s rate which is usually 15%. Any extra earnings realized after that are taxed at the custodian’s rate.
The custodial account has got some benefits. First, the account is actually very easy to set up. You can visit any bank and set up the custodial account, a process that will not take more than one hour. You can contact a brokerage firm in case you want engage into a variety of investments since these firms have all the required details.
Custodial accounts have few restrictions. There is not limit of how much one can deposit into these accounts. If you feel that you want to deposit $1000 for your kid, the doors are wide open. Withdrawals at custodian accounts can actually be done at any desired time. This is done without paying penalties and is for the benefit of your child.