Custodial Accounts: Under 18s Guide to Financial Level Ups

Hey Fellow Finance Nerds!

In today's episode of "real-world skills they don't teach in Fortnite", we're discussing the magic wealth building tool for minors: the custodial account. It may not give you superpowers or epic skins, but it's an asset that can boost your financial score while you're still mastering algebra.

🏦 The ABCs of Custodial Accounts 🎓

Here's the lowdown: a custodial account is a type of financial account that a guardian (like a parent) can set up for a minor. It's akin to a treasure chest that can hold cash, stocks, and bonds, all growing and maturing in value until you can claim them.

🌱 The Benefits of a Custodial Account: The Magic of Compounding 🌳

So, why get excited about a custodial account? The answer is compounding. It’s like a video game where your score keeps doubling.

However, control over these funds isn't instant like a cheat code. It's only transferred when the minor reaches the age of majority (between 18-21 depending on the state). It's a bit like having the highest score but only being able to post it on the leaderboard when you're of age. This ensures that the money is used responsibly when it comes into play.

With consistent contributions and steady growth, you could be looking at a substantial amount by the time you (or your child) is an adult. Imagine starting with pocket change and ending up with enough to buy a decent car. Now that's a power move.

😭 Can’t Escape Taxes 😭

A regular custodial account doesn’t come fully loaded with tax benefits (look into the custodial IRAs for that) . If the account generates money from dividends, interest, or earnings, that’s considered the child's income and will be taxed at the child's tax rate once the child reaches age 18. Don’t stress too much, you’re making money! As of 2022, if the child is younger than 18, the first $1,150 is untaxed and the next $1,150 is taxed at the child's rate. Anything over $2,300 is taxed at the parent's rate.

Got gifts? Anyone can give up to $16,000 ($32,000 per couple splitting gifts) worth of monetary gifts to each recipient without getting their finger smashed by the federal gift tax. Of course there’s more to it than that. Be sure to put on your reading glasses before you dive into the fine print.

🖋 Setting Up a Custodial Account: A Guide for Parents 📋

And for the parents, don't worry, setting up a custodial account isn't as tricky as figuring out the controls of your child's latest video game. It's a relatively simple, four-step process:

1. Choose a financial institution. This could be your local bank, a credit union, or a trusted online brokerage like Fidelity.

2. Decide between a Uniform Gift to Minors Act (UGMA) account or a Uniform Transfer to Minors Act (UTMA) account. Both types serve the same basic function, but the UTMA allows a wider range of asset types.

3. Fill out the paperwork. This will require some information about both you and your child.

4. Make the initial deposit. This is when you actually put money into the account.

5. While we can’t tell you exactly which stocks to invest in, one of the more popular investments are low cost index funds.

Overall, custodial accounts offer a substantial level-up on the journey to building wealth. They're a practical, real-life way to save and invest for the future. So, why wait? There's a high score waiting with your name on it. As always, the best time to invest was yesterday, the second best time is today.