Various types of financial accounts that you can set up for your child?
Through a procedure that is entirely separate from being influenced by advertisements, we determine which items are the best and then offer them to you. If you decide to visit one of our recommended partners, we might get paid for it. For additional information, please see our advertiser disclosure. Every parent has the goal of providing their child with the best possible foundation for future success. By opening a custodial account for your child, you can accomplish this goal and provide them with a head start in terms of their financial future. In other words, a custodial account is an investment account or other financial account held in the name of a person under the age of majority. Although the child retains full ownership of the assets in the account, an adult custodian is responsible for managing the account. When the child becomes an adult, they will be able to assume responsibility for the account independently. This enables you, other members of your family, and friends to give gifts to your child that qualify for favorable tax treatment while they are still young, without transferring ownership of the assets to your child. It is common practice to establish custodial accounts by the Uniform Transfer to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA). Several elements need to be considered when setting up a custodial account for your child. You need to pay attention to the specifics, such as the costs, the account minimums, and the investment choices. We have compiled a list of some brokers that we believe to be the most suitable options for establishing a custodial account.Noteworthy custodial accounts for the year 2022
- Overall winner: Charles Schwab
- Highly recommended to save for college: TD Ameritrade
- Highly recommended for research resources and Robo-advisor: Merrill Edge
- Highly recommended for educational content: Fidelity Investments
Overall winner: Charles Schwab
- Minimum deposit: None required.
- Fees: There are no account maintenance fees, and there are no costs for stock or exchange-traded fund (ETF) trades conducted online.
- Relevant account types available: UGMA/UTMA, 529 plans, and others.
Why we selected it
Schwab offers the industry's most comprehensive and advantageous custodial accounts for various reasons. When opening a custodial account, one of the most compelling arguments in favor of working with Schwab is that the brokerage business makes the process relatively straightforward and low-cost. There is neither a required minimum deposit nor any other costs to be concerned about. You can get started with a little monetary contribution, and the broker will not charge you a commission later on when you buy stocks, mutual funds, or exchange-traded funds (ETFs). You can utilize Schwab as both your broker and your fund manager if you are interested in constructing an automated and diversified investment portfolio. Working with Schwab is advantageous for several reasons, one of which is that the company manages a large number of excellent mutual funds and ETFs. You can also invest in other asset types, such as derivatives; however, you may be required to pay a charge. Thanks to Schwab's robust mobile app, you can manage any custodial accounts you have while moving, making it simple to access and manage your account.Advantages
- There is no minimum required account balance.
- Free trading of equities, mutual funds, and exchange-traded funds.
- It provides a wide range of account options, allowing you to manage all of your investments in a single location.
- Invest in a portion of the shares of companies on the S&P 500.
Disadvantages
- Exorbitant commissions are charged on certain forms of deals, such as options.
Highly recommended to save for college: TD Ameritrade
- Minimum deposit: None required.
- Fees: None required regarding stocks, ETFs, or mutual funds.
- Relevant account types available: UGMA/UTMA, 529 plans, and Coverdell Education Savings Account.
Why we selected it
Another excellent option for custodial accounts is TD Ameritrade, particularly if you are trying to assist your child in accumulating funds for future educational expenses. You can open a tax-advantaged education account such as a Coverdell account, a 529 plan, and a UGMA or UTMA account. Both of these options are available to you. In 2019, Charles Schwab acquired TD Ameritrade completely. He announced that it would combine TD Ameritrade customer accounts with its existing clients while maintaining the thinkorswim trading platform. TD Ameritrade, just like the majority of other large brokers in the industry today, does not charge a commission on transactions involving stocks, ETFs, or mutual funds. It also does not require a minimum account balance, making it simple to open an account and start putting money down for your child right away. The company has had a long history of utilizing technology to simplify the lives of its clients and reduce the costs associated with investing. It purchased the business that claims to have performed the first internet stock trade in 1995. Thus the fact that it has an excellent mobile app that makes it easy to manage your account is not surprising given that history.Advantages
- Multiple account types are available.
- There are no commission fees for standard trades.
- There is no minimum required account balance.
Disadvantages
- Investing in fractional shares is not permitted.
Highly recommended for research resources and Robo-advisor: Merrill Edge
- Minimum deposit: None required ($1,000 for Robo-advisory services).
- Fees: None required regarding stocks, ETFs, or mutual funds.
- Relevant account types available: UGMA/UTMA.
Why we selected it
Merrill Edge is one of our top recommendations for custody accounts for many different reasons. Merrill Edge Automated Investing, the company's Robo-advisory service, is positioned relatively near the top of the list. The software will automatically invest and manage your portfolio per the objectives you specified for the account. The minimum investment is not very high, coming in at just $1,000, and the price is only 0.45 percent of your total assets invested. This is one of the most excellent options available if you are looking for a solution for your custodial accounts that allows you to set it and forget it. On the other hand, Merrill Edge is among the top options for sophisticated investors and represents the opposite end of the investment spectrum. The business organization has access to essential research tools and investment data from well-known S&P Global and Morningstar sources. These tools can make a significant difference if you want to take a more active role in managing your custodial accounts. In addition, Merrill provides a smartphone app that makes convenient portable account management possible.Advantages
- Services of Robo-advisors that are not very pricey
- Research instruments with significant power
- No fees or minimums
Disadvantages
- There is no investing in fractional shares available for Limited account types.
Highly recommended for educational content: Fidelity Investments
- Minimum deposit: None required ($1,000 for Robo-advisory services).
- Fees: None required regarding stocks, ETFs, or mutual funds.
- Relevant account types available: UGMA/UTMA, 529 plans, and youth accounts.
Why we selected it
It is one thing to assist your child financially by providing them with a head start, but it is another thing entirely to instruct them on how to deal with money and make the most of what you have saved. When it comes to educational materials that you and your child can use to learn about money and investment, the educational resources offered by Fidelity stand out from the competition. The Fidelity Youth Account is one of the brokerage firm's distinctive products and services. It is geared toward adolescents and includes a debit card that you may link to the child's bank account. There are no minimum balance requirements, account fees, or ATM fees associated with the account. Your child may use the account and its accompanying app to learn about managing money, and the account even gives them options for investing any extra money they save for the future. Your youngster will gain valuable experience in financial management and investment through this activity. You can use Fidelity as both your broker and your fund manager because the company offers a vast selection of exchange-traded funds (ETFs) and mutual funds; also, it is one of the largest financial companies currently operating.Advantages
- Your youngster will gain valuable experience with this one-of-a-kind Youth Account.
- There are no transaction fees for standard trades.
- There is no minimum required account balance.
Disadvantages
- Limited available data and research on investments
- Can only invest in particular stocks and bonds.
Final verdict
Suppose you decide to open a custodial account for your child. In that case, you should shop around among these brokerage choices and others by comparing their investment menus, account minimums, and fees to choose the most suitable one for your circumstances.How does the operation of a custodial account take place?
A custodial account functions the same way as any other brokerage account, except that the assets belong to a juvenile, and an adult manages the account. The account's custodian can make investments for the child's benefit using the assets in the account. People who want to give their minor children financial presents right away but don't want to give their children power over their money might find that opening a custodial account is the best option. People have more leeway about when they offer presents when they use custodial accounts because the timing of gifts might be significant for gift-tax purposes. When selecting a custodial account to start, it is crucial to consider several factors, including the costs associated with the account, the minimum amount required, and the available investment choices.Are taxes applicable to custodial accounts?
The answer is yes; taxes are levied on custodial accounts. Beneficiaries under the age of 19 or 24 and attending school full-time are exempt from paying taxes on the first $1,050 in earnings made in their account. The following $1,050 is subject to taxation at the child's rate, and any sum over that is subject to taxation at the custodian of the account's rate of federal taxation.When will you be able to get your money out of the custodial account?
When money is transferred into a custodial account, the transfer becomes permanent and cannot be undone. This means that it is transferred over to the child's custody, who is designated as the beneficiary of the account immediately. The people who gave the money or those responsible for it can't withdraw money directly from the account and utilize it. When the beneficiary achieves the age of majority, typically 18 years old but can vary from state to state, they are given complete authority over the account. They are free to make withdrawals anytime they want and use the money for anything they see fit. A custodian is permitted to take withdrawals from a UTMA and spend those monies for the beneficiary's advantage; however, the custodian must be able to demonstrate that the spending was for the beneficiary's benefit. They are obligated to administer the account purely for the beneficiary's benefit, as this is a fiduciary duty.How to make the correct decision when selecting a custodial account
The finest custodial account is the one that meets the requirements set forth by both you and your child. If you want a decent account for teaching your child about investing, Fidelity is a strong choice, while Merrill is a fantastic option if you're looking for a hands-off approach to managing your money. Fidelity is an intelligent choice if you want to teach your child about investing. It would be best if you looked for accounts with low fees because your investment portfolio's performance can be significantly impacted by fees, especially throughout a more extended period of time. Consider how simple it will be to administer the account as another factor. You might find it more convenient to maintain all of your financial matters in one location by opening a new custodial account with the brokerage business you are already working with.Methodology
Our readers can depend upon us to provide them with reviews and ratings of online brokers that are objective, thorough, and comprehensive. Our reviews culminate several months' worth of research and analysis into every facet of an online broker's platform. These aspects include the user experience, the quality of trade executions, the available products, the costs and fees, the level of security, the mobile experience, and customer service. Based on these criteria, a rating scale was developed, and we collected thousands of data points to be included in a scoring system.