Custodial Account Dos and Don'ts
Review these guidelines before opening a custodial account
DO be aware that assets in a custodial account cannot be taken back. Remember: The child will be able to use account assets as he or she chooses when the custodianship ends, usually at the age of 18 or 21, depending on your state.
DO ask if you can specify the age—21, or in some states even older—when the child will take control of the account. It is important to do this when you open the account, since you cannot make any changes later.
DO consider using a custodial account for smaller sums of money and not for large wealth transfers.
DO use a custodial account to help educate the child about money and investing. With a custodial account, you can explain that the money belongs to the child and that you are investing it for her. By showing the child the investment mix, types of assets and quarter-to-quarter performance reports, as well as reviewing educational materials online, you can engage her in the investing process.
DON'T use a custodial account as your primary education or college savings plan. A custodial account doesn't have the same tax advantages as a 529 account or an Education Savings Account (ESA). In addition, 529s and ESAs offer parents more control, including the ability to change the account beneficiary.
DON'T transfer significant assets to a custodial account if you think the child may need to apply for financial aid. Assets held in a child's name, as in a custodial account, weigh more heavily against financial aid eligibility than do the parents' assets or assets held in a 529 or ESA.