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If you want to give a minor a gift of investments or cash, opening a custodial account may be one solution. It can be used for college savings, too.
With each custodial account, only one minor can be named as "beneficiary" and only one adult may act as the "custodian." Only the custodian can make investment decisions. The custodian can't be changed unless he or she resigns or becomes incapacitated, or a change is made by an order of the court.
Anyone can contribute, regardless of income, and there are no contribution limits. However, there's an annual federal gift tax exclusion amount of $15,000 per contributor, per beneficiary ($30,000 for a married couple).
Funds are set aside solely for the beneficiary; there are no other limitations on withdrawals.
Some of the earnings may be exempt from federal taxes; some income may be taxed annually at the beneficiary's and/or parent's rate (also known as the "kiddie tax"). Consult a qualified tax professional regarding specific questions about the tax consequences of custodial accounts.
A custodial account is considered the student's asset, and this type of account generally has a greater impact on financial aid eligibility than other college-savings vehicles, such as 529 education savings plans or Coverdell Education Savings Accounts.
Financial aid is a complex subject and a financial aid officer should be consulted.
Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty. There may be state tax incentives available to in-state residents who invest in their home state’s 529 plan. Student and parental assets and income are considered when applying for financial aid. Generally, a 529 plan is considered an asset of the parent, which may be an advantage over savings in the student’s name. Make sure you discuss the potential financial aid impacts with a financial aid professional. Tax issues for 529 plans can be complex. Please consult your tax advisor about your situation. Edward Jones, its financial advisors and employees cannot provide tax or legal advice.