As a parent, you know how unpredictable life can be. The economic landscape might change significantly by the time your child grows up, and a savings fund can be their buffer for countering such uncertainty and enjoying a more stable adulthood.

Custodial bank accounts for minors are an excellent way to invest in your child’s bright future. If you’re considering opening such an account, there’s a lot you should know before making any commitments. This guide will help make a decision by explaining:

• How custodial accounts work
• What to consider before opening the account
• What other ways there are to support your child’s future

What Is a Custodial Bank Account for Minor Children?

Technically speaking, a custodial bank account is any account opened by a fiduciary—a person in charge of the account—on behalf of the beneficiary who owns but doesn’t control the assets. A parent or legal guardian can open a custodial account for their child and manage it until they come of age.

When you open the account, you can place funds in it or invest in various assets, such as:

• Stocks
• Bonds 
• Mutual funds
• Securities

All assets you put into the account are considered irrevocable gifts belonging to the minor, though they can’t access them until they come of age. The age of account takeover doesn’t need to be the same as the state-defined legal age (typically 18)—the child might not get access to the account until they’re 25 in some states. When they do, you no longer have control over the account, and your child gets unrestricted access to it.

Reasons To Have a Custodial Bank Account for a Child

A custodial account is used to save for your child’s future, which you can do in many ways. The most common is making cash contributions, but you can also invest in different assets to build significant wealth for them.

Another good reason to open a custodial account is if your child inherits a significant sum of money or any other assets. You can restrict access to the funds until they are mature enough to use them responsibly.

Finally, a custodial account is an excellent way to teach your child to invest without the risk of your child making foolish investment decisions. They can’t make executive decisions or control assets until adulthood, which is enough time to teach them how to manage their wealth.

How To Open a Custodial Bank Account for Minors

You can set up a custodial account with many banks, brokerages, and other financial institutions. The process is fast and straightforward—all you need to do is schedule a meeting and provide basic information on your child, such as their name, birth date, and Social Security number (SSN).

Even though the process is simple, opening a custodial account is a big decision. Before you go through with it, you must assess the following:

1. Available account types
2. Tax implications

Types of Custodial Bank Accounts for Minors

When talking about custodial accounts, people typically refer to two types named after the act that governs them:

1. UGMA (Uniform Gifts to Minors Act)
2. UTMA (Uniform Transfers to Minors Act)

Both account types serve the same purpose, though they vary in the assets you can hold. A UTMA account supports a wider variety of assets, including less common ones like art or intellectual property. 

Another notable difference is the account takeover age. While UGMA accounts are typically transferred to children when they reach the state-defined legal age, a UTMA account might be in the parent’s control for an extended time (until the child turns 25, as mentioned earlier in this guide).

Besides the two main types, there are several other options for custodial accounts you can choose from, depending on your goals:

Account	Main Purpose
Custodial Roth IRA	Saving for retirement through tax-advantaged contributions
Custodial 529	Saving for college and qualified education expenses
Coverdell Education Savings Account	Saving for qualified K-12 and college expenses

Unlike these accounts, UTMA and UGMA don’t have a specific intention, so your child is allowed to spend the funds as they please after taking over.

Tax Implications of Custodial Accounts

Source: Nataliya Vaitkevich

Until your child assumes independent responsibility for the custodial account, you’re in charge of all applicable taxes. While taxes can vary, you should pay special attention to two universal implications:

1. The gift tax
2. The kiddie tax

As mentioned, all contributions to a custodial account are considered irrevocable gifts to your child, so they’re subject to the gift tax. The good news is that there are exclusions—for 2023, up to $17,000 are tax-exempt, and your spouse can gift the same amount. If both parents participate in the account, the total limit for 2023 is $34,000.

Note that the exclusion typically changes annually, so make sure to check it for the ongoing tax year when you open the account.

The kiddie tax was imposed by the IRS to prevent tax avoidance through gifts. If your child’s custodial account generates an income—which it most likely will—it’s subject to the kiddie tax.

Unearned income from the custodial account is taxed as follows:

1. First $1,250—tax-exempt
2. The next $1,250—taxed at the child’s rate
3. $2,500 and over—taxed at the parent’s rate

If your child has unearned income generated by the account, you can use Form 8615 to file the appropriate taxes. Much like the gift tax, exemptions and thresholds may differ depending on the tax year.

Want To Give Your Child a Head Start in Life? Help Them Build a Strong Credit Profile

Even if you build significant wealth for your child, you never know when they might need access to credit. To kick-start their relationship with lenders and make many life milestones easier, you should help your child start and build a solid credit profile.

Without your help, they likely won’t get their first credit score before 21 because the CARD Act of 2009 made it hard for anyone younger to obtain credit cards. Other financial products are equally inaccessible to young adults with no credit.

The conventional approach some parents opt for is adding children to their credit cards, which lets the child inherit the parent’s score. This method is flawed for several reasons:

• The parent’s credit activity impacts the child’s profile, so any red flags will show up on both reports
• The parent must give the child full access to their credit card, which can lead to significant debt without proper financial education
• The child piggybacks on their parent’s credit profile instead of building their own—all credit activity related to the parent’s card is deleted from the child’s profile when they’re removed from the card

If you want to avoid these limitations and help your child build a strong credit profile, FreeKick is a much better solution.

Build Your Child’s Credit and Protect Their Identity With FreeKick

There are two aspects of a good credit profile—a secure identity and a good credit score. Offered by Austin Capital Bank, FreeKick is an FDIC-insured deposit account that helps you cover both these aspects for your child.

Steps for Using FreeKick’s Credit Building Service

Your child is eligible for FreeKick’s credit building service if they’re between the ages of 13 and 25. This service is a good way to help them establish a credit history early on in life in only three simple steps:

1. Create an Account—Create an account at FreeKick.bank and choose a deposit that suits your budget
2. Set It and Forget It—FreeKick will start building 12 months’ worth of credit history for your child
3. Keep Growing—After 12 months, close the account without any fees or continue building credit for your child for another year

With these steps, your child can have up to five years of credit history when they turn 18. This will help them save $200,000 during their lifetime by helping them secure better loan terms and other financial benefits.

How FreeKick Protects Your Child’s Identity

Child identity theft happens every 30 seconds, and if your child falls victim to it, all your credit building efforts can go to waste. In the worst case, your child might get charged with crimes like credit card theft, so it’s a good idea to proactively invest in protecting their identity. FreeKick’s ID protection services include:

Services for Minors	Services for Adult Children and Parents
Credit profile monitoring Social Security number (SSN) monitoring Dark web monitoring for children’s personal information Up to $1 million identity theft insurance Full-service white-glove concierge credit restoration Sex offender monitoring—based on sponsor parent’s address	Credit profile monitoring SSN monitoring Dark web monitoring for personal information Up to $1 million identity theft insurance Full-service white-glove concierge credit restoration Lost wallet protection Court records monitoring Change of address monitoring Non-credit (Payday) loan monitoring Free FICO® Score monthly FICO® Score factors Experian credit report monthly

FreeKick Pricing

FreeKick offers two pricing plans:

FDIC-Insured Deposit	Annual Fee
$3,000	$0 (Free)
No deposit	$149

With both plans, you get:

1. Credit building for six children aged 13 to 25
2. Identity protection for two parents and six children aged 0 to 25

Make sure you cover all bases when setting up your child for financial success—sign up for FreeKick today.

Featured image source: nattanan23