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My parents opened a custodial account for me when I was a little girl. They didn’t put much in it at the time, but it grew so much that I’m about to use it for a very important purchase. For those who aren’t familiar with custodial accounts, they are savings accounts you open for a minor that legally belong to said minor, but are supervised (and often contributed to) by the adult who opened it until said minor becomes 18 years old. So my parents were never allowed to take money from my custodial account for their own use (more on that later). They could put money in there—to see it earn and grow, so I could use it one day—but they could not take money out for any personal use because, legally, that money was mine.
Now don’t worry about creating a hefty account for an 11-year-old: she can’t touch it either. The minor whose name is on the account cannot just grab it any time she wants to buy toys or a new car. That being said, the custodian (presumably you, the parent) is allowed to use the money in there for things that directly benefit the child, such as prep school tuition or a second language tutor. Later, the money will fall under the control of the child when she turns some age between 18 and 21, depending on in which state you live.
The only other control the custodian has—other than using the assets in the account to fund things that directly benefit the child—is to move the assets from, say, a stock to a bond, or some new avenue for earnings. It’s kind of a great concept, don’t you think? I didn’t even know I had such an account until I turned 18, and when I discovered it, I was truly touched. Wow: that was something my parents did, to secure my future, that has had a huge impact on me. Here are reasons you should start a custodial account for your kid, and what to know about them.
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There are two kinds; here’s type 1
There is not just one type of custodial account, so it’s good to familiarize yourself with your options, to choose the best one for your goals and financial situation. One type of custodial account is called a Coverdell ESA. The money in this account is to be used solely for educational purposes, there is a limit on what you contribute each year ($2,000), and it is only available to families who fall under a certain income level. Luckily, the taxes on interested earned in this account are deferred and any withdrawals made for educational purposes will not be taxed.
