Under the laws that govern custodial accounts, including the Uniform Transfers to Minors Act (UTMA), account custodianship ends and the beneficiary becomes eligible to assume control of the account at a specified age—typically 18 or 21, depending on the state.
Opening a custodial account for the child in your life can be an excellent way to set them up for future financial success. But, as with anything related to money, you must consider the tax consequences. You may owe taxes at both your rate and the child's, and they might even have to file a tax return.
Yes, money can be withdrawn from custodial accounts, as long as it is used "for the benefit of the minor," a vague term that includes, but isn't limited to, educational costs.
In most states, the minimum age to invest in and trade stocks is 21, and in 10 states, the minimum age is 18. A custodial account or a trust can hold investments until children come of age. Presumably, you'll want to teach them about investing so they are prepared to take over when the time comes.
The drawbacks: You can't change the beneficiary of a custodial account once it's established. Your child can use the money however they want after reaching a certain age, and investment income in custodial accounts may trigger the kiddie tax. The account can impact financial aid eligibility.
Minors do not have direct access or control over the funds until they reach legal age. However, once the minor reaches age 18, 19, or 21 (depending on the state), the custodian can deliver the funds to the minor, and account becomes theirs and they are free to do whatever they want with the money.
A custodial account can be an excellent way to make a financial gift to a child—whether your own, a relative's, or a friend's. This type of account, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), is set up by an adult for the benefit of a minor.
When you turn 18 years old, you can maintain a joint bank account with your parent or open a new one in your name. You can also ask for their consent to remove them as a joint account holder.
If you're looking for tax advantages, you probably want to consider a 529 plan. Using funds from a custodial account on education does not come with tax benefits. However, the IRS considers the minor the owner. That comes with a perk.
When a beneficiary reaches the age of majority (21 in most states), the custodian must turn the account over to him or her. At that time, the beneficiary will become the owner of the custodial account, controlling all of its assets.
What is the gift tax exclusion? The basic gift tax exclusion or exemption is the amount you can give each year to one person and not worry about being taxed. The gift tax exclusion limit for 2023 was $17,000, and for 2024 it's $18,000.
Cons of a Custodial IRA
There are contribution limitations in place. There are other options for retirement plans that have higher contribution limits. Even though you are not assessed a penalty on the contributions when you withdraw them, you may be assessed a penalty on the earnings like interest and dividends.
These accounts are controlled by a custodian, usually the parent. Depending on state law, when the child attains age 18 1 or 21 2, he or she assumes control of the account.
As of 2024, the first $1,300 of a child's unearned income is tax-free, and the next $1,300 is taxed at the child's rate. However, any unearned income over $2,600 is taxed at the parent's rate. This is true even if all the money to fund the custodial account came from a grandparent or someone other than a parent.
To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination.
A custodial account is the property of the child, but managed by the parent until the child turns 18. With a joint account, parent and child both have access, but the adult can supervise or limit activity, say, putting a cap on the amount the child can withdraw the account by actively monitoring the activity.
Once your child reaches age 18, you can no longer make decisions for them, even if they're incapacitated, unless they have signed a health care proxy. Similarly, a durable power of attorney authorizes you to manage your child's finances in the event that they are unable to make decisions themselves.
The moment it gets deposited into a children's long-term savings accounts, it also becomes your child's property. Therefore, any withdrawals you make can only be withdrawn and used for things that benefit the child (e.g., school expenses, college tuition, etc.).
For example, California allows the transfer to be delayed until as late as age 25 if the trust is titled “as custodian for (Name of Minor) until age (Age for Delivery of Property to Minor)”. If the trust is not titled in this manner, the age of trust termination remains age 18.
For example, in California a custodial account will terminate when the minor attains age 18 unless you specify a later age, up to age 21. (A custodial account established under a trust or a will may terminate as late as age 25.)
Compare your options side by side. Custodial accounts, known as Uniform Transfer to Minors (UTMA) or Uniform Gift to Minors (UGMA) are different from college savings accounts. Learn more from our comparison table.
Specifically, your rights as a parent diminish when your child turns 18, including the right to know anything about their finances, medical condition, or even school records. That means, for example, that if your child were injured, you wouldn't have the right to make medical decisions on their behalf.
The CFPB says that under state law or terms of an account, you usually cannot remove the joint account holder without the consent of the other person. One advantage to having a joint account at the same bank as your parents is the ease with which they could transfer money from their account to yours.
After my child turns 18, what happens to their bank account? Normally, the child's bank account will upgrade to an adult's current account automatically. But you may need to request for this change to be made.