Do I pay taxes on a custodial account?
What are the tax implications of a custodial account? Your child must file taxes if he or she received unearned income of more than $1,250 (in 2023) or $1,300 (in 2024) or earned income of more than $13,850 (in 2023) or $14,600 (in 2024).
Disadvantages of Custodial Accounts
Any deposit or gifts made to the account is irrevocable, meaning it cannot be changed or reversed. All of the account's holdings pass, irrevocably, to the minor at the age of majority.
- Note: As custodian, you're supposed to be able to account for where the money went. If you pulled money from the account to buy a computer for your child, make a permanent record of this fact.
- Costs of education. ...
- Car for the child. ...
- Paying taxes on the account's income. ...
- Transfer to another child. ...
- Paying family expenses.
Gifts are irrevocable: Contributions to a custodial account are considered irrevocable—meaning you can't get that money back—and funds can be withdrawn by the custodian only to pay for expenses that would directly benefit the child before the age of majority.
Do I Have to Pay Taxes on My Child's Savings Account? Interest earned on a savings account is considered unearned income. Per IRS rules, if a child has more than $2,500 of unearned income, that money will be taxed at their parents' tax rate or their own—whichever is higher.
If you receive a 1099-DIV with your child's social security number on the form and more than $1050 in the total amount of investment income is received then you'll need to enter your child's income into TurboTax to generate form 8814 in order to report the income.
There are situations where a custodial account makes a lot of sense and could make planning easier. For instance, if your child inherits or is gifted money, you could use a custodial account to manage the money until they grow up and can manage it on their own.
Is a Custodial Account a Good Idea? A custodial account can be a great way to save up money for your child's future.
As the custodian, you can withdraw money from a custodial account if you need to use it to pay for something that will benefit the minor. You can't take the money back yourself, or give it to someone else.
What are the tax considerations for custodial accounts? Any investment income—such as dividends, interest, or earnings—generated by account assets is considered the child's income and taxed at the child's tax rate once the child reaches age 18.
Who owns the money in a custodial account?
Assets and income in a custodial account belong to the minor beneficiary (the child). Minors with unearned income such as interest, dividends, and capital gains, generally have to file an income tax return if, among other things, their unearned income is over $1,300 (in 2024).
When children reach the age of majority, the account can be transferred into their name only with custodian consent. Otherwise, they can remove the custodian from the account at the age of termination. Ask your brokerage firm what ages apply to your son's accounts and the steps you need to take at each point.
Can I take money out of my child's custodial account? All money put into a custodial brokerage account becomes irrevocably your child's. That means you can't withdraw money for your own personal use after you've contributed it.
You can liquidate the investments in the UGMA/UTMA account and invest all of the proceeds in a 529 plan (though you may incur tax liability). The key is that the proceeds must be used for the benefit of the same beneficiary.
Yes. Assets held by banks in a custodial capacity do not become assets or liabilities owned by the bank. If a bank is bought or fails, custody assets remain the property of the account owner. They are not subject to the claims of the bank's creditors.
Interest earnings for a children's savings account are subject to income tax if they exceed a certain amount. If your child's interest, dividends and other unearned income total more than $2,200 in one year, the unearned income for certain children might be hit with federal taxes.
The general rule is that a parent can claim a dependent child's investment income on their own return up to a certain amount —above that, the child needs to file themselves. To claim a child's income on a parent's tax return, the child needs to be considered a qualifying child dependent of the parent.
Your dependent children must file a tax return when they earn above a certain amount of income. Dependent children with earned income in excess of $13,850 must file an income tax return (for the 2023 tax year).
If you receive a Form 1099-DIV and do not report the dividends on your tax return, the IRS will likely send you a CP2000, Underreported Income notice. This IRS notice will propose additional tax, penalties and interest on your dividends and any other unreported income.
If the form has your child's Social Security number and the amount of the investment income is less than $1,050, you don't have to report the income. However, if the Form 1099-DIV has your Social Security number on it, you're required to report this nominee income on your return.
What can I use custodial account for?
Custodial accounts allow you to open and manage an investment or savings account on behalf of a minor. You are the account custodian until the minor reaches the age of majority in their state. They can be used to help a child learn how to invest, or for wealth transfer.
In summary, if you are looking for a simple way to transfer wealth to a minor, a custodial account may be a good option. However, if you want more control over how the assets are used, or if you have specific goals or needs, a trust may be a better choice.
Contributions to the account can come from parents, family members and friends, and custodial accounts do not have contribution limits. While there is no minimum amount needed to open this type of account, the investments you choose may require a minimum.
- Charles Schwab: Best for all types of investors.
- Merrill Edge: Best for Bank of America clients.
- Vanguard: Best for mutual funds.
- Fidelity Investments: Best for low fees.
- TD Ameritrade: Best for active traders.
- E*TRADE: Best robo advisor.
- Acorns: Best for mobile.
When the minor beneficiary of an UTMA custodial account reaches the age of majority, the custodianship is over, and they get legal control over everything that's in the account. It's important to note that the age of majority is slightly different in each state. In most cases, it's either 18 or 21.
