We all want the best for our kids so when it comes to planning for a baby’s financial future, parents are eager to set aside money for their children to access down the line. Many parents opt to open a simple savings account to stash all the monetary birthday gifts that will trickle in through the years. And there’s nothing wrong with that there’s no risk of losing the money, and your bank probably pays a little bit of interest over time. But what if you could possibly grow your child’s money over the next decade or so?
A custodial account, which allows parents to invest their kids’ cash in mutual funds, stocks, bonds, and exchange-traded funds (ETFs), can be a way to increase the money over time and see returns on your balance. Here’s everything you need to know about setting up the Best custodial account for a baby.
What Is a Custodial Account?
Simply put, a custodial account is a savings vehicle access through a financial institution or brokerage firm that adults control for minors under the ages of 18 to 21, depending on state laws. Parents (aka the custodians) are in charge of all transactions. While the amount of money required to open a custodial account can be minimal, a financial services company in New York, allows users to start off with just $5 the fees associated with having one vary depending on who you’re banking with.
There are two types of custodial accounts: UGMAs (Uniform Gifts to Minors Act) and UTMAs (Uniform Transfers to Minors Act), and different states generally allow one or the other. UTMA rules enable parents to invest in a bigger pool of assets, including real estate, while a UGMA account restricts itself to more traditional securities (this means no high-risk investments like stock options or buying on margin).
Custodial Account Rules
To open a custodial account, all you need is basic information about your child: name, birthday and social security number. Once it’s set up, you manage all the action in the account, which revolves around deposits and deciding which assets to invest in. You can also make cash withdrawals at any time, but the money must be used on behalf of your kid. Keep in mind that there may be fees involved with getting out of certain assets, and any capital gains on liquidated funds are subject to taxes.
Optimizing Your Custodial Account
Opening a custodial account for your child will most likely entail dealing with stocks or stock-like funds, such as ETFs. If you’re at all skittish about exposing your child’s money to the bit of risk that dabbling in the market requires, remember history shows that for the long-term, investing in stocks and mutual funds is a much more lucrative way to earn interest than what a basic savings account will return. You’ll have to find the right balance between your desire to make money and your tolerance for losing it something Stash might be able to help with.