What is a custodial savings account?


Quick Answer

A custodial savings account is a type of savings account opened for a minor by and under the name of a custodian. This type of account is usually opened by parents for their children to save up for their education expenses or for any other costs that will benefit the child, notes the Wells Fargo Advisors website.

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Full Answer

The custodial savings account was established under the Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) depending on the state. In a custodial savings account, the minor owns all the assets in the account but the custodian is control of the account's investments. The custodian remains in control of the savings account until the minor reaches the age of majority, which is 18 to 21 depending on the state.

Among the advantages of a custodial savings account include tax breaks, ease of access to funds and the option to use the funds in the account to invest in securities, mutual funds and bonds, notes Learnvest.com. While custodial savings account will still be taxed, it is only levied according to the tax bracket of the minor who owns the account.

The tax bracket of a minor is usually lower than the income tax bracket of the custodian. The funds that is accumulated in the account may also be used for other expenses such as buying a new car or for recreational vacations.

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