Custodial accounts allow you to invest on behalf of a minor child. You retain managing control, but all funds in the account belong to the child. Once you make a deposit to the account, you may not withdraw any funds for your personal use or change the beneficiary on the account. The child takes full control of the account upon reaching the age of 18, 19 or 21, depending on your state laws.
Gather the necessary identification documents for you and the child. You will need your driver's license or state identification card, the child's birth date and both of your Social Security numbers for tax reporting purposes. You may also be required to show the child's birth certificate as proof of the correct birth date.
Contact a bank, broker or other financial institution to open an account. Request the paperwork for a new custodial account. Complete the forms according to the instructions. Make sure to list your name as the custodian and the child as the beneficiary of the account.
Make a deposit to fund the account. The deposit procedure may vary among financial institutions. You may be required to bring in cash or a cashier's check if you do not already have an account at the same institution. If you do have an existing account, the bank may allow you to simply transfer funds from your account to the minor's account.
Use the funds in the account to purchase one or more certificates of deposit, or CDs. Choose your CDs based on the length of the term and the interest rate. You will receive more interest as the term gets longer. Make sure you or the child will not need to cash out the CD before the expected maturity date. The account will be charged an early withdrawal penalty if you cannot wait until the CD matures. You can purchase several CDs with staggered maturity dates to give the child more investment flexibility in the future.
You must file a tax return in the child's name if the custodial account earned any interest during the year. Using a custodial account instead of giving your own investment income to the child reduces the tax owed on the earnings, because the child will be in a lower tax bracket. For the tax year 2012, the first $950 of interest earned on a custodial account is tax free. The next $950 must be reported on the child's tax return. Any interest earned after that must be reported as income on your tax return.
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