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Custodial Accounts

Your child has come to you with a sock stuffed with fifty $20 bills he's saved over the past two years. He tells you he wants to invest it. What can you do? After you've picked your jaw up from the floor, your first responsibility is to be an information source for your child. You need to be knowledgeable about the different types of investments available to them, as well as which will benefit them most in the long run? how can you fulfill this huge responsibility? Well, you've taken the correct first step.

Our role at YoungBiz is to educate both teens and parents, and right now it's your turn. 

There's a ton of information out there, whether you (or your child) are a new kid on the block or a seasoned vet. For a general overview geared toward your child, check out our  Taking Stock section. These give basic information for an investor just opening their portfolio. The Investment FAQ covers nearly any question you may have about opening a portfolio, why investing is advantageous, and how to go about it without getting burned. 

After taking in all of this learned advice, you have to deal with the rough part. Which one to choose? Here are a few more bits of info that may affect your decision:

If your child chooses to invest in stocks or mutual funds, you will have to open a custodial account. The account will be set up as Uniform Gift to Minors Act account (UGMA) or a Uniform Transfers to Minors Act Account (UTMA), depending upon your location.

Once your teen reaches legal age (either 18 or 21, again depending upon location), the money becomes theirs alone. Why is this a problem? Thinking in terms of a college education, having the money in their name can be a serious obstacle. Additionally, they begin to be taxed at the adult rate.

One of the benefits is that minors have fewer tax liabilities. Annual investment income under $650 is not taxed, and from $650 to $1,300 your child is taxed at 15%. Any amount over $1,300 is taxed at an adjusted parent's rate. 

And your role if your child is successful? Sit back, smile, and ask them to be your investment counselor.