5 Things To Know About Custodial Account & Under Age Trading
Do you want to open a brokerage account for your child? If so, then you are in luck! Today, we are going to learn more about custodial accounts and how they work. These accounts are a great way to help your child start saving for college or simply to help them learn the value of money.
It’s Not Your Money Any More
When you open a custodial account, and put money in it, the cash does not belong to you anymore. While you will still be in control of the money as a manager, you can only spend or invest that money if it benefits the child.
Also, you can’t take the money out of the custodial account and move it to another supplemental account for another child. This is something to keep in mind while setting up this type of account.
Your Child Will Gain Complete Control of The Account At 18 to 21
When you open up a custodial account for your child using guidelines set up by your state’s Uniform Gifts to Minors Act (UGMA), your child will get the entire account when they turn 18 in some states and 21 in others. You will cease any control you have on the account and your child can do whatever they want to with the money.
This can be an issue for some teenagers or young adults who have poor money management skills and a bad attitude. It would not take long for a teen to completely wipe out all the money you have saved for them over the years. This is why you should think about this before you decide to open this type of account for you child.
How Taxes Work
Your child may have to pay taxes if the income from investing is over $1,000. This means that he or she will have to file a tax return the same way an adult has too.
This tax often called the Kiddie Tax which could be as high as 39.6% and is based on the parent’s current tax rate. This is just one more thing that you should keep in mind.
Underage Trading In a Custodial Account
Now if you are not over the age of 18 then you won’t be able to trade in the account but it is still a good way to see how the markets work and how trades are entered. Getting started at an early age on learning the value of money and how to manage risk is an important skill that everyone should learn.
Custodial accounts are a great way to get your child involved in the markets and understand the importance of saving and investing. If you are interested in opening this type of account, check with your broker to see if they offer it. Most major brokers will have this option.
Let us know if you have any question in the comments below!