How to Open a Custodial CD Account for a Minor

A custodial account is a popular way to save for a child's education.

A custodial account is a popular way to save for a child's education.

A custodial account is a tax-advantaged account that allows you to save and invest for your minor child. While your child technically owns the assets, your job as custodian is to manage those assets until your child reaches the age of majority, which ranges from 18 to 25, depending on the state where you live. Investment options in a custodial account are nearly limitless and include certificates of deposit.

Contact a financial services firm. Most banks, brokerage houses and other financial institutions can open a custodial account for you. Some even enable you to open custodial accounts online. If you want to buy CDs in the account, ask if the firm offers them for sale before you sign any paperwork. Most financial firms do.

Provide identifying personal information. Custodial accounts require information from both the custodian and the minor beneficiary. Specific requirements can vary from firm to firm, but generally include your name and address, employment information and Social Security number. You also need the name, date of birth and Social Security number of your minor child. The account title will typically list your name as custodian for your child's name under the Uniform Transfers to Minors Act of your state.

Transfer money into the account. Custodial accounts have no contribution limits, but you do relinquish ownership of any funds you contribute. You cannot later withdraw the money for your own purposes, or change the beneficiary.

Purchase CDs. One investment strategy with a CD account entails purchasing a "ladder," a series of CDs that mature in successive years. Each year that a CD pays off, you can reinvest it in another CD at the end of the ladder. This strategy helps to minimize interest-rate risk and provides greater liquidity to your portfolio.

Report your taxes correctly. One of a custodial account's tax advantages lies in the fact that some of the income generated by the account is reported on your child's taxes. Since your child is most likely in a lower tax bracket than you are, this can result in a higher net investment return than if you had invested the money in your own account before gifting it to your child. As of 2012, the first $950 of income generated in a custodial account is tax-free, with the next $950 reported under the child's name. You must report earnings above $1,900 on your own personal taxes.

 

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