Custodial Accounts: Non Tax Advantaged Savings Account[Video]by Michelle Smalenberger, CFP® / August 24, 2020
Today we are discussing custodial accounts. Maybe you’re trying to plan for your child’s future and all the options you look at help you cover college expenses but you just want to save for their future, not only college. You understand that there are tax benefits to saving in college savings accounts, but you want flexibility for how the funds will be used.
Custodial accounts can be used to save for your child with flexibility in how the funds are used. Here are a few points you want to be aware of when considering this type of account:
Provides flexibility in that funds just need to be used for the child listed on the account. Uses could be for lessons or education costs even though there’s no tax benefit. This could also be used for a first-time home purchase if the funds haven’t been used yet. So this would become beneficial for a child who gets a full-ride scholarship to a college and now that money saved for them can be used on something else. You avoid the 529 penalty on funds not used for college. While you are the custodian on the account you may even have to submit a receipt to prove the funds are being used for their benefit.
These funds are fully theirs. At their age of majority, which in most states is 18 or 21, the funds actually become theirs. So up to this age you are the custodian for the account, but at their age of majority the funds are now completely theirs and you are removed as the custodian. This is important because many parents question whether their 18 or 21 year old will spend the money wisely.
We’ve seen these accounts handled very well by many young adults. Some end up using the funds for a first-time home purchase.
This is another great account type that provides you some flexibility in saving for your child’s future! Wondering how this affects your finances? Contact us to discuss!
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