Custodial brokerage account vanguard
But if you inspire your child, your paperboy or the girl who mows your lawn to start investing now, it could change their lives. Kids who start investing early can grow rich with ease.
He mows lawns and walks dogs. I used to teach a high school personal finance class. When I showed kids how money compounds over time, many itched to start investing right away.
About a third of my students opened investment accounts. Depending on your state, that would occur between the ages of 18 and Aidan opened his custodial account with Schwab. The average investor in actively managed funds pays about 1. Aidan will outperform most of these investors because his fees are much lower. His index fund costs just 0. When investing, the less you pay in fees, the more you get to keep.
Sixteen year old Chase Schachenman was one of my students who opened a custodial account with Vanguard. You can see how he did it by following the online screencast that he created for my class. About 10 percent of the fund is made up of bond indexes. The remainder is invested in stock indexes. Chase pays a paltry 0. The fund gets automatically rebalanced each year. But they have to be earning an income during the year they make the contribution. Here are some of the concerns:.
Those assets belong to the child. Never transfer assets to a custodial account if you have any concern whatever that you may need to recover those assets later.
When your child turns 21 or an earlier age, in some states , the custodian must turn the assets over to the child. Some people are mature and thoughtful at age 21 or earlier; many are not. Some people think of a custodial account as a good way to save for college, and learn only later that the account causes a reduction in financial aid.
Under current law, assets owned by the child including any assets in a custodial account for the benefit of that child count much more heavily than parental assets in determining financial aid awards. For children who are college-bound, the availability of financial aid is a relevant concern in setting up a custodial account. A custodial account belongs to only one child. That can be a real dilemma for parents who are intent on treating their children equally.
A trust can be set up for the benefit of all your children, but a custodial account is owned directly by the child named at the time it was established. The reason is that if you die before the account terminates, the account will be included in your estate. This is true even though the transfers to the account are completed gifts. The account is included in your estate because you retained the power to determine how your gift will be applied for the benefit of your child.
You can avoid the problem by naming as custodian someone who will not make any gifts to the account. For example, a grandparent might name the parent as the custodian. You have a legal obligation to support your child.
If you use income of the custodial account to satisfy that obligation, the IRS may contend that the income will be taxed to you in that case, not to your child. If you are concerned about this issue, you should use the account only for items that supplement your legal obligation to support the child.