Considering a monetary gift for your grand-kids for Christmas? They will certainly be happy, but you should read through this piece I wrote back on November 16, 2018 first.
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 |
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| 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:
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