Understanding Custodial Savings Accounts for Children's Future

Custodial savings accounts are a great way to help children save for their future. They're designed to help minors save money without the need for them to have a job or make financial decisions.

You can open a custodial savings account for a minor as young as one day old. This allows parents or guardians to start saving early and take advantage of compound interest.

These accounts are typically managed by an adult, often a parent, who makes financial decisions on behalf of the minor. The adult's name will be on the account, but the child's name will also be listed as the beneficiary.

The money in a custodial savings account belongs to the minor, and when they turn 18 or the state's age of majority, the account is transferred to them.

A custodial savings account is a type of kids savings account where an adult is designated as the custodian of its funds.

You can open a custodial savings account at a bank, including Ally Bank or a credit union.

The money in these accounts is the property of the minor but is managed by the custodian.

Custodial accounts are the most common type of kids savings accounts.

When the minor reaches their state's legal age of adulthood, the funds are turned over to them.

The most common types of custodial accounts are known as Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), depending on your state.

A custodial savings account is a great way to save for a child's future, and it's relatively easy to set up.

You can contribute up to $18,000 free of gift tax in 2024, or $36,000 for a married couple.

The adult custodian opens the account for a specific child and can then add money to the account and choose investments.

The account will be restricted once the child passes the state-mandated age and control has not been transferred.

The custodian must transfer the account to the child within an allotted period of time once the child reaches a certain age, typically between 18 and 25, depending on the state.

A portion of any earnings from a custodial account may be exempt from federal income tax, up to $1,250 in 2024.

You can transfer existing shares of stocks, mutual funds, or other securities from your own account into a custodial account.

The account must be transferred to the child at a certain age, whereas a trust allows for greater flexibility in defining the terms of the transfer.

Custodial savings accounts offer a range of benefits that make them an attractive option for parents and guardians.

One of the main advantages is the flexibility they provide. There are no limits on the custodian's eligibility to contribute based on their income, no contribution limits, and no requirements to make regular distributions.

Custodial accounts are also free from income, contribution, or withdrawal limits. This means you can contribute as much as you like, and the funds can be withdrawn at any time without penalty.

Establishing a custodial account is a relatively simple process. It's much easier and less expensive than setting up a trust fund.

Here are some of the key benefits and drawbacks of custodial savings accounts:

While custodial accounts offer many benefits, they also have some downsides. One potential drawback is that the account can limit the amount the child can receive in financial aid from a college because it is considered an asset owned by the minor.

Custodial savings accounts have some tax advantages, but it's essential to understand how they're taxed. The IRS considers the minor child the owner of the account, so the earnings are taxed at the child's tax rate up to a certain point.

For 2025, the first $1,350 of unearned income is tax-free, and income over $1,350 is subject to the child's tax rate. This is up from $1,300 of unearned income tax-free and income over $1,300 subject to taxation in 2024.

The kiddie tax applies to children under 19 years old – 24 for full-time students – who file as part of their parent's tax return. This means the child's unearned income, such as interest and dividends, is taxed at a lower rate.

Here's a breakdown of the kiddie tax rates for 2025:

Keep in mind that the child's tax rate applies to unearned income over $3,150 in 2025. This is up from $2,600 in 2024. It's essential to review the tax implications with a financial advisor to ensure you're making the most of this tax advantage.

You can open a custodial savings account online in just a few steps, and online banks often offer more competitive interest rates due to lower overhead costs.

Online banks are a great option because they tend to have more competitive interest rates.

A custodial account can be opened through a brokerage like Ally Invest, where you can gift stocks, mutual funds, and bonds to your child.

You can also open a custodial account through a traditional bank, but online banks often have more benefits.

To open a custodial account, an adult must be 18 or 21 years old, depending on the state, and can manage the account until the child reaches the age of majority or a designated later age.

An adult can open a custodial account for a child, and it's a great way to save on their behalf or give a financial gift.

The funds in a custodial account can be used for anything, with no early-withdrawal penalties or restrictions on how they're used for the child.

You can invest in stocks, bonds, mutual funds, and more through a custodial account, giving your child a better financial future.

A custodial savings account can be a great way to save for a child's future, but it's essential to consider the features and potential impact on their financial aid eligibility.

Security is a top priority, and you'll want to choose a bank that's a member of the Federal Deposit Insurance Corporation (FDIC), such as Ally Bank. This ensures that deposits are insured up to the maximum amount allowed by law.

The interest rate and compounding periods are also crucial factors to consider. A higher annual percentage yield (APY) can earn you more interest over time, and Ally Bank Savings Accounts offer features like buckets and boosters to help automate and grow your savings.

Consider the following factors when choosing a custodial savings account:

Remember, a custodial account can be used to give a child a better financial future, and with no income or contribution limits, it's a great way to save on their behalf or give a financial gift.

UGMA/UTMA brokerage accounts can make sense when saving and investing on behalf of a child, but there are some important things to know about the accounts. These accounts are considered irrevocable gifts, meaning the money belongs to the child once it's transferred to them.

A key consideration is the gift tax, which may apply if you contribute more than $18,000 per year to an UGMA/UTMA account. Married couples who elect to gift-split can contribute up to $36,000 per year without making a taxable gift.

Earnings on UGMA/UTMA accounts are taxable, and income from investments is considered unearned income by the IRS. For children, unearned income above $2,500 is taxed at the parent's rate in 2023.

The age at which the child must take control of the account varies by state, typically between 18 and 25 years old. Once the child takes control, they can use the money for any purpose.

Here are some key things to consider when opening a UGMA/UTMA brokerage account:

It's essential to evaluate your goals and the child's needs before opening a UGMA/UTMA account, as they may not be the best option in all situations.

Opening a savings account for your child is a great way to teach them the value of money. To start, consider factors like security, interest, and minimum balance requirements.

Security is key, so choose a bank that's a member of the Federal Deposit Insurance Corporation (FDIC), like Ally Bank. This ensures your deposits are insured up to the maximum amount allowed by law.

Interest rates can vary greatly between banks, so look for annual percentage yield (APY) when comparing accounts. Ally Bank Savings Accounts also offer features like buckets and boosters to help grow your savings.

Consider opening a custodial account, also known as an UGMA/UTMA account, to give a child a financial gift or to save for their future. These accounts have no income or contribution limits and no early-withdrawal penalties.

You can open a savings account online in just a few steps, often with more competitive interest rates than traditional banks. Online banks tend to have lower overhead costs, which means more savings for you.

Teaching your child smart financial behaviors can benefit them in the long run. Start by guiding them with simple budgeting skills and consider opening a savings account to get them started.