No limits on contributions
Your kid ultimately controls the money
Custodial accounts, known as UGMAs (for the Uniform Gifts to Minors Act) and UTMAs (for the Uniform Transfers to Minors Act), let you put money or other assets in trust for a minor child and, as trustee, manage the account until the child reaches 18 or 21, depending on your state. At that age, Junior owns the account and can use the money for whatever he wants -- be it tuition, a trip to Europe or a new car.
There’s no limit on how much a parent can put in a custodial account. However, it’s smart to cap individual annual contributions at $13,000 to avoid triggering the gift tax. Speaking of taxes, full-time students under age 24 pay no tax on the first $950 of unearned income and the child’s rate on the next $950. Earnings above $1,900 are taxed at the parents’ marginal rate.
Investment choices in custodial accounts aren’t restricted, as they are with 529 plans. That’s a plus. On the downside, large balances in UGMAs and UTMAs can hurt chances for financial aid. Custodial accounts count as student assets, and the federal financial-aid formula calls for students to contribute 20% of savings (vs. 5.6% of savings for parents).
By Jane Bennett Clark