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Your Questions, My Answers: Custodial Accounts and Gifts to Minors

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Your Question:

My mother is planning on gifting my children some money this year. Since there is enough in their 529 accounts, I thought I would open custodial accounts for them to take care of this money, and start them on the road to retirement saving and learning about investing. In your opinion, is a custodial account the best option in this situation and if so, is Fidelity a good place to do it?

My Answer:

Yes. I like custodial accounts and have them for my children. You can establish a Uniform Gift to Minors or a Uniform Transfer to Minors referred to as UGMAs or UTMAs. A custodial account starts your child on the investing path while you control the money until the child reaches the legal age in most states of 18 or 21 (some states allow it to age 25).

Because the account is owned by the child, the UGMA/UTMA is generally taxed at the child’s, most often lower, tax rate. Up to $1,050 in earnings is tax-free while the next $1,050 is taxable at the child’s tax rate.

A word of caution: If you’re considering financial aid, keep in mind that a custodial account is your child’s asset. The federal financial aid formula typically requires a student to contribute more of his or her assets to college costs (up to 35%) compared to 5.6% of their parents’ assets.

More on custodial accounts here from Fidelity:

Custodial account features

Low-cost investing No annual account fees, no trading fees for most Fidelity mutual funds, and online stock commissions on U.S. equity purchases are only $4.95.1
Wide range of investment offerings Stocks, bonds, and options, more than 10,000 Fidelity and non-Fidelity mutual funds, index and exchange-traded funds, among other offerings
Support Access to knowledgeable representatives
Powerful research and tools Free independent research from more than 20 providers

Advanced trading platform and tools for Active Traders
Ease of use Online access to the account so you can move money into the account

Many easy ways to deposit money in the account, including transferring funds from a bank or another financial institution, using direct deposit, or check
Uninvested cash Uninvested cash in your account is held in what is known as a core position. Think of your core position as a place where money is held before you invest it or distribute it from your account. For a custodial account, you may choose among many core positions:

  • Fidelity Government Money Market Fund (SPAXX), a taxable money market mutual fund investing in U.S. Government Agency and Treasury debt, and related repurchase/reverse repurchase agreements. Intended for investors seeking as high a level of current income as is consistent with the preservation of capital and liquidity.2
  • Fidelity Treasury Fund (FZFXX), a taxable money market mutual fund investing in U.S. Treasury securities and related repurchase agreements. Intended for investors seeking as high a level of current income as is consistent with the preservation of capital and liquidity.2

 

Originally posted on Your Survival Guy. 

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.

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