What You Need to Know About Custodial Savings Accounts

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Custodial Savings AccountWhether you’re starting your first job or your first day of elementary school, it’s never too early to learn about personal finance. In fact, teaching your kids (or your nieces and nephews, for that matter) about the value of money will help them for years to come. And there’s no better way to help them prepare for a financially secure future than to set up their first savings account.

What’s a Custodial Savings Account?

A custodial savings account is a savings account that you open in a child’s name. Although they are usually opened by parents saving for their children’s education, custodial savings accounts can be opened for any minor under a custodian’s name. Anyone, including friends and relatives, can contribute to the account, but the underage child can only withdraw money with the permission of the person who opened the account. There are no limits to the amount of money that can be deposited into a custodial savings account, but amounts over $12,000 are subject to the gift tax. When the child reaches a certain age (usually 18 or 21), he or she will get full control over the money in the account. While custodial savings accounts are usually opened to set aside money for college, it’s ultimately up to the child to decide what to do with the money once he or she comes of age. We’ll explain more on that in the next section.

What’s So Great About a Custodial Savings Account?

A custodial savings account is as easy to set up as any savings account. Any type of investment can be deposited into the account, including cash, savings bonds and annuities. Unlike 529 plans, which are reserved strictly for college savings, the money accumulated in custodial savings accounts can be used for anything from a new car to a down payment on a first home to a backpacking trip across Europe. Although custodial savings accounts are taxed, they are taxed at the rate of the child’s tax bracket, which is usually lower than the income tax bracket of the adult who opened the account. Custodial savings accounts can also produce tax advantages, since $950 of the investment income (the money you make from interest and other investment earnings) will be tax-free every year.

How Do I Get Started?

Custodial savings accounts can be opened at any bank, or even online. Do some research beforehand to find the bank that offers the highest interest rate (read here for more information on high-yield savings accounts and their interest rates) and make sure the bank is FDIC-insured. The minimum amount necessary to open an account will vary depending on the interest rate but usually ranges between $500 and $2,000. To report the interest under your niece or nephew’s name, you’ll need his or her Social Security Number. You might want to consider naming a beneficiary for the account, such as a parent, who can take over as custodian of the account in case something happens to you. You can start teaching financial responsibility early on by having children deposit birthday and holiday money into their accounts. They can watch as the $10 Grandma mailed last Christmas grows to finance their college tuition.

  • Anonymous

    I’m really grateful that my parents opened one of these for me when I was really young. I was maybe five years old, and remember being excited to deposit even tiny sums like $5 into my savings account… 

    • Deneen

      Every Sunday after mass, we head to the grocery store, which also has our credit union in it.  I give my son $5 a week to put into his savings account that has my husband as the custodian.  At the age of 9, he has already put aside over $2,000, which gets rolled into a cd every time he hits $500 in his account. 
      In addition, he receives money for extra chores around the house, like folding laundry.  I give him $1.00 for a load of towels, which must be folded the way I taught him, and then put away nicely.  To encourage reading, I give him a penny a page for each book he reads, rounding up to a dollar for any book that has 70+ pages, and the rule is he must read different books, they can’t be the same ones over and over.  That extra money is used for what he would like to buy.  Right now, he has over $50 that will go toward something he really wants.  I am proud of him for his saving habits so far. 

  • Eugenia Tsirikos

    I have a question about a savings account like this. If this type of account is to teach children how to save up the little bit of money they get or put in then the trustee wouldn’t withdraw that full amount right? I’m asking bcuz my now ex boyfriend who is not the legal guardian wound up withdrawing all of my son’s money he ever had in there. By legal law does the trustee have the right to do that when he’s not the legal guardian and the money was actually the minor?

    • Lilbitofthis

      Absolutely. He was the custodian on the account and has the legal right to manage the account.

      • putty mcclegg

        From what I’ve read, the money in a custodial account is gifted to the child and if used by the custodian, it legally must be used for the benefit of the child. So if your ex-boyfriend made off with the money and used it not for the child, this IS illegal. Even if he was the custodian of the account. (Was he? And not the legal guardian?)

  • damonleesmith22

    My wife was killed in a car accident a couple of years ago, and at that time I received an insurance settlement of which my eight year old daughter received 200 thousand, which was placed into a certificate of deposit of which she can not touch until the age of 21. I have no control of this money, but the judge explained to me at the time that if I needed money for her needs I could request it and the judge would have to approve.. Here is my problem with the whole thing.. The bank knows this money will be locked in for the next eleven years, and they are giving her a percentage of like .012, which is next to nothing. In the last two years she has gained only around $2000 dollars in interest.. In effect they are robbing her blind. Is there anything I can do.