#198: Legacy Series: Should You Open a Savings Account or a Custodial Account For Your Child? | Legacy 110

Anna Sergunina: 00:00:01

You and I know that making smart financial decisions can be challenging. But it's 21st century, financial freedom is no longer just for the 1% worth. It is for you and me. The question is, how do we find time, avoid making painful mistakes, and find the best resources to help us reach our financial goals? Join me on my journey helping busy families figure out how they can gain financial confidence and clarity, get actionable tips, and learn from the best experts on how to stop trading time for money. It is now the time you started living your best financial life. My name is Anisha Winona, and welcome to the money boss podcast. Hey, money bosses in is here. And welcome back to the money boss podcast. So we're continuing our discussion about kids savings accounts. And today, I wanted to dive in and really spend some time understanding the types of accounts that are available to you. And we can discuss some of the features and benefits because I think that's by far one of the largest questions I get is which of these accounts really makes sense for me. And so let's talk through the two types of accounts that you can start. And then hopefully that will kind of get you thinking about all right. Now, I know you've listened to the previous episode where we talked about the reasons right and your why. So hopefully now you know that that should help you make a decision the type of account you want. Okay, so let's start with the basic savings account. Right. And just before we dive in, so there's there's two kinds that we're looking at here, because we're talking about minors, right. So there's restrictions on things. So we have savings account, and we have something called custodial account, I'll talk I'll talk about custodial account in just a bit. But for savings account, it's pretty straightforward, right? It's not any different than the savings account you may already have. The difference is is that your child owns that account with you. Right. And so that means that they have access to the funds from the account, you just are, you know, you could act as a supervisor, right? If you're totally, completely 100%. Trust them. That's, that's fine. But that's not I guess one of the drawbacks, the parents want to have a little bit more oversight and decision making as to what happens to the fun. So it's a savings account that has a joint ownership feature and the child is on that account with you, it also could present a really great teaching opportunity for them to gain some skills and be responsible adults, right young adults with finances. The one that I wanted to spend a little bit more time on is the custodial account. And there's two different types that exists out there. One is called these are these are acronyms you t ma, which stands for Uniform Transfers to Minors Act. And second one is you g m a Uniform Transfers, gifts to Minors Act account. And so these accounts are actually different in the form of how they're structured and what happens to the money. Unlike the savings account that we just talked about, where you actually are joined owner of the funds in that account. And you know, the distributions can be made from that account, you can take the funds away. So everybody has and the same goes for the child, everybody has that, that opportunity. With these custodial accounts, it's really considered to be an asset that is really truly owned by your child, except that they're not available, or they cannot access the funds in this account until they turn 18. Right or angel majority for most states. So that's a that's a unique feature, because you truly designate these as kids accounts. And what's really cool too, is that it gives you opportunity to invest in all kinds of funds, right? All kinds of assets, I shouldn't say font, all kinds of assets. So that's why I like maybe perhaps having one of each, you know, depending on what your goals are. Also, when you transfer funds right into the custodial accounts, whichever one you choose, the funds actually are no longer yours. So they get off your box even though you know you're still managing the account. But it's it's already considered to be a completed gift for gift tax purposes, and therefore it's owned by the child. Now we'll talk also a little bit about taxation and what happens because if it's not a savings account, I'm hoping that we can really put these accounts to work so for example, kind of the distinction distinction and how do you decide Do you need a UTM A, or UDMA account. So UTM, a account can pretty much hold any kind of asset. It could be stocks, bonds, it can hold a real estate. So if you have a house or a building or any other property, it can hold intellectual property, works of art, and things like that, you GMA accounts are a little bit more limited to things like financial assets, right, or cash security. So this is stocks, bonds, mutual funds, annuities, and insurance policies. So it's just a different day, it just depends on what you really want. So if you want real estate in those, you're probably going to go for the UTM. So YouTube, these are actually more popular. I was this interesting fact that I don't know if any of you live in South Carolina, but South Carolina actually does not allow UTM a accounts for whatever reason, I don't know, I was surprised by that. So but because these accounts are now technically they're you know, they're not accounts that you own. So they're, they're in the name of your of your minor, we need to talk about and if we investing in securities, we buying real estate, or whatever else that it is that you're interested in buying, there are even bitcoins extra, it's a good, good point, I am not 100% certain if that's the case, if you can hold a Bitcoin and UTM account, but you know, anything other than the cash, we're really talking about taxes, okay, so you need to, you need to understand how that works. Because it's not as simple as just that teeny bit of interest you're earning in your savings account. As of 2021, the first $1,100 of our unearned income that comes from these accounts is tax free. And then the next $1,100 is taxed at 10%. And then everything above to the two tiers to $2,200 combined, will be taxed at the parents rate. So there is some advantages, and I hope you earn more than $2,200 in that account, right? If you invested properly, but it gives you a little bit of a break, right? while the kids are so little. So one of the features of this account is that when they reach the age of majority, or in the state of residence, so usually a team, then they they become legal owners, right? Or that that structure changes, they're not minors anymore, so it becomes their account. And then they take that account off your books in terms of taxation, okay, so if there's been a huge gain in that account, and you haven't really sold anything, then it becomes theirs. And then when they do liquidate the funds, then that's what really happens. Now I'm covering today really broadly. So for something like this, I definitely advise for you to discuss it with your own financial advisor, or your tax tax person to get more specifics of like, how would that work. But I like these accounts, because it gives me the flexibility to put, you know, anything more than just a savings account type of funds. So also something to think about what happens to these savings accounts or two savings accounts in general when kids are each age 18. Right. And so most banks will convert because, because the banks do designate these accounts as minor accounts, right, or accounts for the benefit of the minor. So they actually convert these accounts to regular accounts when they turn 18. And so depending on what bank, you're you're having a relationship, one of the features of minor or custodial accounts, is that the fees are different, right. And so particularly for the savings accounts at the bank, we're not getting a whole lot of interest these days. But when the fees are low, that's even better. So that's one kind of thing to watch out for. Right? So you may have a young adult who's about to turn 18, and they have savings account. So really, it becomes becomes their own at that point. So let's talk a little bit more next time about some of the features that we're looking for when we set up savings accounts. But for right now, I hope this discussion was useful. And you really have some idea of what what to look for and really go back and think about the goals. It isn't about just hey, I need to open an account for my child. It's really about what what the goal and what are you trying to accomplish? Until next time. Remember, you are the bosses of your own money. Hey, money boss. Thanks for tuning in today. If this episode did help you then please be sure to share it with someone else