Can I open a brokerage account for my child?
Parents who want to make smart financial decisions and teach their children to do the same often ask, “Can I open a brokerage account for my child?” »
The good news is that yes, you can open a brokerage account (or a mutual fund, retirement account, or college savings account) for your bundle of joy (or precocious toddler or brooding preteen). . The even better news is that you will have more account types to choose from than if you opened one for yourself.
Types of accounts
When you’re ready to open a brokerage account for a child, the first thing to look for is account types.
If your child has no earned income, put them to work! I’m joking. If your child does not receive a paycheque, you can choose between two types of accounts that do not have a maximum contribution limit: a guardian account and a custodial account.
In a guardian account, you own the money. You can withdraw it for any reason and you are liable for income tax at your own tax rate. In practical terms, a guardian account allows you to informally allocate funds to your child in an account in your name.
With a deposit brokerage account, you don’t own the money, your child does. As long as your child is a minor, you control the account, but any withdrawals (or dividends) may be taxed to your child, who will likely have a much lower tax rate than you. As a guardian, you can only make withdrawals to cover certain expenses for the benefit of the child. In other words, you give up some long-term control (as well as ownership), but it’s usually a better deal from a tax standpoint.
The Uniform Gift to Minors Act (UGMA) account and the Uniform Transfers to Minors Act (UTMA) account are two types of deposit accounts. The type your child receives depends on the state you live in. The UGMA allows your child to hold titles without having recourse to the services of a lawyer or a trustee. UTMA expands UGMA and also allows minors to own other assets, such as real estate, art or patents. The UTMA account is a popular estate planning tool for transferring assets into inheritance.
Custody accounts are considered assets of the child. This means they can impact financial aid eligibility.