Money Anecdotes

2 Responses

1. #1 JPInvestor
   A custodial account is one in which the minor (you) is the owner of the money and investments but an adult (parent) signs all of the paperwork and makes all of the decisions. It is typically set up as: PARENT NAME as custodian for YOUR NAME.

   You can do all of the research and choose your investments, but the final say has to go through the custodian on the account. Depending on your state, when you reach 18 (or 21 or some other age), the account can then be retitled into your own name.

   You should probably set up an UTMA account through an online broker (TD Ameritrade, E*Trade, etc). A parent could be the custodian and sign the documents, but you could log into the account and utilize the research, trade (with your parent), etc.

   You can usually call the online broker and they can tell you the requirements for setting up the account.

2. #2 uncat
   I believe the law may vary from state to state, but in my state (Illinois,) you can’t open a brokerage account until you’re 18. You can ask your parents to open a custodial account for you (an UTMA account in most states, an UGMA account if you live in Vermont, or, I think, South Carolina.) The account needs to be titled “Custodian’s Name as custodian for Your Name under the (your state) UTMA”, though that usually gets abbreviated by the bank or brokerage.

   You can buy pretty much anything you want in a custodial account, with a few limitations. You can’t borrow in a custodial account, which means you can’t trade on margin (borrow money against the value of stock in your account,) or sell short.

   There are a couple of things you should be aware of:
   1) Custodial accounts are your money — any earnings are reported under your social security number, and they have to be turned over to you once you reach the age of termination — but they’re completely controlled by the custodian. The bank or brokerage firm would be breaking the rules if they took instructions from you on what to buy or sell — the custodian has to give those instructions. If you disagree with the custodian’s actions, there’s nothing you can do unless you want to get a court to remove the custodian.

   2) The age of custodial termination varies from state to state — in most states it’s 21. State law may or may not permit the custodian to hand the account over to you before the age of termination (21,) even if you’re allowed to open an account at 18.

   3) You’re 17, so I would guess you’re thinking about going to college. If you’re planning on applying for financial aid, you should know that a custodial account is considered your assets (not the custodian’s assets) on the FAFSA application — which means it generally counts against your aid more than if those assets were your parents’.

   4) If you’re thinking of investing for the longer term, and you’ve had a job this year, you should consider having your parents open a Roth IRA for you. Up to 100% of your earned income (or $4000, whichever is less) can be put in the Roth IRA. There are lots of rules about IRAs, and I would definitely recommend your parents speak to a tax adviser or financial adviser about it, but generally you’ll be able to withdraw any contributions you’ve made without tax or penalty, and withdraw any earnings without tax or penalty if you’re using them to pay for college, a first home, or retirement when you’re 59 1/2.

   Some of the same things I mentioned about custodial accounts apply to Roth IRAs; until you turn 18, the parent has control of the account, and you can’t borrow (or, more generally, engage in transactions considered “speculative”.) The IRA can be turned over to you when you turn 18.

   I know this is all probably too much info. Best of luck!