Custodial Accounts with E*TRADE
A custodial account is a savings or investment account that you can setup for the benefit of a child or minor once they reach adulthood. You maintain control over managing and investing the assets in the account until the child becomes a legal adult, at which point they become the legal owner of the account and all of its assets. Most brokers, including Etrade, offer custodial accounts as they are relatively easy to setup. This article will focus on the custodial account offered by Etrade.
What Are Custodial Accounts Used For?
Most custodial accounts are opened by a parent wishing to put away some savings to give their child a financial head start in life once they turn 18 (or 21 in some states). Typically, the child turned young adult might use the account to fund college or to make a down payment on a first house, but in reality they can use the money however they wish since they become the sole, legal owner of the account upon adulthood.
Who Controls the Funds in a Custodial Account?
As the creator of a custodial account, you are only allowed to withdraw funds from the account prior to the child reaching adulthood if the money is used strictly for the child’s benefit. This is why it’s so important to understand the legal structure of a custodial account - once it’s created you have no legal recourse to reclaim the funds in the account if you change your mind. As the account creator, you manage the funds for the benefit of the child until adulthood, but the assets are no longer yours.
Custodial Account Fees with Etrade
The only fees and commissions that apply to a custodial account with Etrade are the same that you would find with their standard taxable accounts, so there are no additional costs to opening a custodial account versus a taxable one. This means that an Etrade custodial account doesn’t have any account opening or maintenance fees, but all of the standard account trading fees (commissions, regulatory fees, wire fees, etc.) still apply.
Better Custodial Account
A brokerage firm called TD Ameritrade offers $0 commission on stocks, ETFs, and $49.95 on all mutual funds. There are no custodial account fees whatsoever. TD Ameritrade has a richer selection of mutual funds, and the best trading and research tools. Learn more...
Open TD Ameritrade Account
Custodial Account vs. Trust
The only benefit a custodial account offers over a trust is the more simple legal structure, which makes it cheaper and easier to establish. On the flip side, a custodial account doesn’t offer the same level of flexibility as a trust would. None of the details or terms of a custodial account, including the benefactor, can be changed after it is established so you should only create a custodial account when you are fairly certain of your plan.
The Tax Benefits of a Custodial Account
You might be wondering, with the lack of flexibility in custodial accounts, why not just create a regular investment account under your own name and give the money to your kids on your terms? The answer is that despite the rigid terms of custodial accounts, they do offer some tax benefits that you won’t get with a taxable Etrade account. There are no limits to how much you can contribute to a custodial account; however contributions above $14,000 are subject to the gift tax.
Prior to the child taking ownership of the account, the first $1,000 of annual investment income is not taxed, and the next $1,000 is only taxed at the child’s tax rate, which in most cases will be the lowest income tax bracket. Income above $2,000 is taxed at the parent’s tax rate until the child takes ownership of the account, at which point all income will then be taxed at the child’s tax rate.
If you are looking for a way to start saving and investing some money to help your kids once they are ready to leave the nest, you should consider a custodial account. As long as you are confident in your plan, a custodial account’s lack of flexibility is compensated for by its tax-advantages; it will help stretch your money further for the benefit of your kids. Whether you choose Etrade or another broker to open your custodial account, the best time to do it is probably now.
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