July 12th, 2011

What You Need To Know About Custodial Savings Accounts

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**Today’s guest post is contributed by LearnVest.**

Whether 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.

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.

Read more about custodial savings accounts on LearnVest!

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.

One Comment

  1. I think it is very important to open up a savings accounts in your childs name. It teaches them from an early age that savings are important and that you need to work towards it.

    Savings Accounts at 11:46 pm on March 24, 2012

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