Pros & Cons of a Custodial Account

The custodial account is a type of financial account that you can set up for a child. This type of account carries with it some advantages and disadvantages. Here are a few of the pros and cons of using a custodial account.

Pros

One of the biggest advantages of this type of account is that it is easy to set up. You should be able to set one of these accounts up at any bank or financial institution that you choose. You will be able to visit the bank and fill out some basic paperwork in order to get the account started. You will then be able to fund the account with an initial deposit. You can continue making deposits on this type of account as often as you would like.

Another big advantage of this type of account is that there are few restrictions. You can put as much money as you want into this type of account and you will be able to invest the money in different securities as well. You can even set the account up so that the child's parent is in charge of how the money is used. If the parent wants to get some of the money for their child, they are free to do so at any point.

With a custodial account, you will be able to prevent a young child from having free access to a large amount of money. For example, if you wanted to put back money for their education, you could put the money into a custodial account so that they would not be able to spend it on something else. Most young children are not very good with money and this type of account is a good way to overcome this problem and help them at the same time.

Cons

One of the potential problems with this type of account is that they are taxed heavily. If you earn less than $950 from the account, you will not have to pay taxes. Anything above that is going to be taxed at the child tax rate or the parent's marginal tax rate depending on how much money was earned.

Another problem with this type of account is that the child is going to gain complete control of the money once they become an adult. In some states, they will be able to access the money whenever they turn 18. Other states make them wait until they are 21. Either way, there are lot of immature 18 and 21-year-olds when it comes to handling money. Giving them access to a large amount of money all at once may not necessarily be in their best interest.

This type of account can also affect financial aid eligibility. If your child is planning on going to college, when they apply for financial aid, the money in this account is going to be counted when determining if they are eligible. This means that they may not be able to get the financial aid that they need.


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