Opening a mutual fund account for a minor is not a lot different from opening an account for yourself. Each of the states has passed either the Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), both of which control how an account in a minor's name will be handled and controlled. UTMA and UGMA accounts are basically the same thing; each state simply decided which form of the bill it wanted to use. Most states have now gone with the newer UTMA.
Contact the selected mutual fund company to obtain or access a new account application. Many mutual companies let you go through the entire application process online. Other ways to apply include using a broker to invest in a load mutual fund, or downloading and printing an application to be completed and mailed to the fund company with a deposit check.Step 2
Complete the application by selecting "custodial account" as the account type. List the minor with her Social Security number as the owner/minor and an adult to act as the custodian of the account. The custodian, typically a parent or grandparent, has power over the account until the minor reaches legal age.Step 3
Fund the account either electronically or by check. Many fund companies let you set up Automated Clearing House (ACH) transfers to withdraw money electronically from a bank account without charge. If you already have money with the fund company, it might be possible to sell some of your shares and transfer the money into the new minor's custodial account.
- A custodial account is designed to be irrevocable until the minor reaches the age of majority in your state, typically age 18 or 21. Until that time the named custodian can make changes to the account or change the investments, but the money most remain for the benefit of the minor.
- When the minor reaches legal adulthood, full control of the account transfers to the minor.
- A UTMA mutual fund account can save on taxes. The first $950 in earnings is not taxed, the next $950 is taxed at the minor's tax rate, and annual earnings above $1,900 are taxed at the parent's tax rate.
- Money in a child's name in a UTMA account will be counted as assets when applying for college financial aid. A large custodial mutual fund balance might limit the amount of aid the minor can receive.
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