- Custodial accounts help you plan and achieve for your child's future.
- Custodial brokerage accounts can be used in any way you wish for your child.
- When the child reaches adulthood, they can use it however they wish.
- While there are other options, a custodial account might be the right fit for you
- Loved offers something different
- You can get started in as quick as 5 minutes with just $5
As parents, we all want to be doing the best for our kids. Getting started saving and investing for your kids early is one of the best things you can do for them. Your kids will certainly be thanking you when they realize the extra opportunities you were able to unlock by investing early.
For those parents that want to get started investing for your kids, it can be confusing and we want to be with you in providing the right information. We're going to explain custodial accounts which is the Loved Investing's account option.
What is a custodial account?
A custodial account is a type of account that allows a minor to own investments before they are an adult. An adult opens the account on the minor's behalf and controls it until they reach the age of majority. The age of majority is the age at which the child becomes an adult, 18 or 21 depending on their particular state.
Is there just one type of custodial account?
There are actually two types of custodial accounts. The first type is called a Uniform Transfers to Minors Act (UTMA) and the second type is called Uniform Gift to Minors Act (UGMA). The difference between the two lies in the kind of assets you can store. For a best UTMA account, you can hold essentially any type of asset such as real estate or intellectual property while a UGMA account is limited to strictly financial assets such as stocks and ETFs.
Ok, great, but why should I open a custodial account?
Well, let us look at alternatives to a custodial stock account before we delve deeper into the advantages of disadvantages.
You might be familiar with a 529 account. It is a tax-advantaged investment account designed to encourage parents to start saving early for their child’s education. The money you put into the account is tax-free and once you withdraw, your money will not be taxed if it used for your child’s education. The issue with 529 accounts is two-fold. Firstly, the money in your 529 account can impact financial aid and secondly, if you do decide to withdraw the money to be used for non-educational purposes, there is a 10% penalty as well as the taxes you have missed.
Now, where is a custodial account different?
At this stage you are probably asking yourself “cool, but who pays taxes on a custodial account?” or “can I withdraw money from a custodial investment account?" etc. Let us answer those questions for you.
- With the best custodial account for minors, you can invest that money in companies and products both you and your child believe in. Watch your money grow and take advantage of the incredible benefit of compound interest in what Albert Einstein called the “eight wonder of the world”.
- There are tax benefits too. Custodial Accounts get to take advantage of the zero-tax rate on your child's first $1,050 of unearned income. After that they get a reduced tax rate up to $2,100, after which they are then taxed at the custodian's tax rate. Moreover, you can withdraw that money any time with no penalty once the funds are used for the benefit of the child.
But what are the drawbacks?
Similar to 529 accounts, there are of course tax implications and it can potentially hurt financial aid too. However, there are ways to combat this and one of the most effective ways is to liquidate and transfer assets from the custodial brokerage account to a custodial 529 plan account. In this case, the ownership is transferred back to the parent and so the impact on financial aid is lower.
What makes Loved unique?
Unlike a Fidelity, TD Ameritrade, or a Vanguard custodial stock account, Loved’s focus is on both growth and education. While our app offers the tools to invest in companies and industries that you believe in and are familiar with, we also want to be the go-to platform for your financial education. Investing for a child is one thing but showing them how and why you invested is another. We can make this that bit easier through the educational content we provide on our platform.
Give yourself the choice to save and invest for any expense in their future, and at the same time choose investments in things you are familiar with - think Apple, Disney, and Facebook - Warren Buffett's Berkshire Hathaway or Big Tech companies. There are so many options for you and your child to choose from.
Now, what if your parents wanted to send money to their grandchildren in the form of stock? Well, we’ve made that easy to do by allowing a seamless gifting experience on our platform that allows contacts to send stock to one another. Instead of a $20 bill in a card, why not $20 worth of a stock that can both grow in value and simultaneously teach the child the fundamentals of investing? Take that leap in setting up your family for a more financially secure future.
How do I get started?
If you are interested in how to open a custodial account, we will gladly help you. We want to make it as easy as possible for both you and your family to setup an account and start investing.
In just a few minutes with as little as $5, you can setup an account with us today and start building for your future. Avoid the usual trading and brokerage fees that similar platforms charge and make that first investment in any of the numerous stocks and ETFs we offer on our platform.
While there is no perfect solution to overcoming financial burdens, our best custodial accounts offer you the opportunity to grow and learn. Think bigger. Think Loved.