For parents who want to turn their child’s interest in investing into a full on learning experience, you probably already know that your financially savvy kid cannot begin investing in stocks until the age of 18. Since opening a brokerage account is out of the question for your minor, there are ways around this rule. The Uniform Gifts to Minors Act (UGMA) works almost like a trust. It allows parent’s to setup an account to hold assets for a minor without hiring an attorney or creating a trust, says financial advisor Jesse Abercormbie. Here’s what you need to know about the account:
Custodian needed: Though the assets are considered property of the minor by law, a custodian controls the account until the child turns 18 or 21-years-old, depending on the state.
Gifting Limits: This account is subject to the $13,000 Gift Tax Exclusion. In other words, up to $13,000 per year may be given by an individual to the account without being subject to the Gift Tax.
Kiddie Tax Rule: While any investment up to $850 is potentially untaxed, subsequent investments up to an additional $850 may potentially be taxed at your child’s tax bracket, or 10%, which is known as the so called “kiddeâ€ tax. Any extra income can be taxed at the parent’s tax bracket which will most likely be 35%.
Bye, bye financial aid? Possibly: Once of age, the assets are considered your child’s income. This may become a disadvantage if your child tries to apply for need-based aid such as grants, scholarships and even certain types of government loans to pay for college.