Custodial account

(redirected from Custodial Accounts)
Also found in: Dictionary, Thesaurus.

Custodial Account

An account at a bank, brokerage, or insurance company held by an adult guardian on behalf of a minor child. That is, the minor child owns the custodial account, but the parent or guardian manages it and makes all decisions related to it. The child takes control of the account at a certain age: 18, 21, or 25, depending on the jurisdiction. Importantly, the account is taxed at the guardian's marginal tax rate until the child turns 18, at which point it is taxed at the child's rate.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Custodial account.

If you want to make investments on a minor's behalf, or transfer property you own to that person, you can open a custodial account with a bank, brokerage firm, mutual fund company, or insurance company.

You name an adult custodian for the account -- either yourself or someone else -- who is responsible for managing the account until the child reaches the age of majority.

That age may be 18, 21, or 25 depending on the state and the type of account you choose. At majority, the child has the legal right to control the account and use the assets as he or she chooses.

There may be some tax advantages in transferring assets to a minor. If the child is under 18, investment earnings above a specific level that Congress sets each year are taxed at the parents' marginal tax rate.

But if the child is 18 or older, all investment earnings are taxed at the child's rate -- again, typically the lowest rate. In addition, gifts you make to the account are no longer part of your estate, which may reduce vulnerability to estate taxes. However, it's wise to review your plans with your legal and tax advisers.

One drawback of a custodial account is that the assets are considered the property of the child, and may reduce the amount of financial aid the child qualifies for when he or she enrolls in a college or university.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
For one, money transferred to a custodial account belongs to the minor.
457(g) with regard to funds belonging to eligible government plan trusts or custodial accounts under Sec.
An individual is not required to disclose interests that are held in a custodial account with a U.S.
All annuity contracts (including custodial accounts and retirement income accounts) purchased by an employer on behalf of an employee are treated as a single annuity contract for purposes of applying the requirements of IRC Section 403(b).
To a tax sheltered annuity contract established under the provisions of IRC Section 403(b) to the extent the assets are held in one or more custodial accounts.
Taproot claimed that because the Roth IRA was a custodial account, it was a qualified trust for purposes of being an S corporation shareholder.
Then they should plan to oversee the activities that the providers of annuity contracts and custodial accounts are engaged in to cooperate with the compliance.
Annuity plan amounts (not 403(b)(7) custodial accounts and not amounts attributable to elective deferrals).
Congress also created custodial accounts in 403(b) plans which allowed employees to set up retirement plans with mutual fund companies under Section 403(b)(7).
Options to save for college include 529 plans, prepaid tuition plans, educational saving accounts, custodial accounts and savings bonds.
First, I took my original college funds, which were in custodial accounts, and converted them to 529 plans.
Medicare set aside accounts, medical custodial accounts, self administration support services.