Pros and cons of a custodial account
Custodial accounts are often used in place of other savings plans for children, especially college savings accounts. Unlike college savings accounts, custodial accounts allow for a great deal more flexibility. There are no contribution limits or regular distribution requirements and no distribution penalties.
They can also provide tax advantages if the child who is the owner of the account is your own. Since the money in the custodial account is considered to belong to the child, earnings are taxed at the tax rate that would apply to the child, not to you and your spouse. If your child is earning just a small sum, no tax at all may be assessed, or it may be assessed at a very low rate, allowing you to essentially defer some tax on realized income for your household. The federal gift tax rules also apply to custodial account distributions.
Keep in mind that deposits you make into a custodial account are irrevocable, and all of the money in the account passes to your child when they reach the age specified by state law, generally 18 or 21. You will never be able to change the beneficiary, either, once the account is established.
Related investing topics