Parents often serve as the custodian of custodial savings accounts they open on behalf of their children. Two parents may serve as joint custodians on one child's custodial account if permitted by state law and bank policy. Once established, parents can use funds in the account to pay for the child's needs as they arise or save the money for later use.
Purpose of Custodial Account
Custodial savings accounts, known as UGMA or UTMA, are accounts established for the benefit of a minor. An adult custodian, often a parent, manages the account until the minor reaches legal termination date. This is usually 18 or 21, but is determined by state law. When the minor achieves legal age, he takes over control of the account and may use the funds as he wishes.
Opening Custodial Account
Opening a custodial account is similar to opening other types of banking accounts. An application is completed in which details about the minor child and custodian are provided along with identification. Whether more than one custodian can be listed on the account depends on state law and the policy of the individual bank. If two custodians are permitted, each will have authority to conduct transactions on the account, including withdrawals.
Once the account is established, any earnings or withdrawals are taxed at the child's tax rate, which is significantly less than that of the adult custodian. Additionally, single persons can contribute to the account up to $14,000 per year, while married couples can contribute up to $28,000 per year without incurring a gift tax, as of 2013.
Impact on Financial Aid
Since funds in a custodial account are treated as the income of the minor, these funds will be counted as income once the child attends college. This can greatly reduce the financial aid award the student is eligible by up to 35 percent.
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