Overview of Custodial Account For Kids
In the United States, you must be 18 years old or older to open your own brokerage account and start
investing. Custodial investment accounts are a way around this restriction.
Custodial accounts were created by the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to
Minors Act (UTMA). The UTMA account is the newer version. Most states have adopted it, although a few states only offer the UGMA account.
Both custodial accounts are managed by an adult (the custodian) on behalf of a minor. By law, the assets must be turned over to the minor once he reaches the age of majority, which could be as high as 25 in some states.
Custodial Accounts For Kid at Schwab
Schwab is a popular brokerage firm and offers many account types, one of which is the Schwab One® Custodial Account. This account has the same fee schedule as other Schwab brokerage accounts, which means $0 trades on U.S.-listed stocks and ETFs. Option contracts are 65¢ each, per side. And there are thousands of mutual funds without loads or transaction fees.
The Schwab One Custodial Account has no annual fee, and there’s no minimum balance, either. Because a custodial account at Schwab can trade some stocks in fractional shares (called Schwab Stock Slices™ at the broker), it’s possible to start investing literally with just $5.
Contribution and Tax Guidelines
Schwab follows the same federal guidelines for custodial accounts that other brokerage firms follow. This means there is no contribution limit on the Schwab One Custodial Account. There is, however, a gift tax on contributions above $16,000 per year, per parent (as of 2024).
Earnings under $2,600 per year (as of 2024) in a custodial account receive favorable tax treatment from the IRS, which is one of the major reasons to open one.
Free Charles Schwab Custodial Account
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Opening Schwab Custodial Account
A custodial account can be opened in either UGMA or UTMA format
(depending on the state of residence) on the Schwab website in a matter of minutes.
Find the ‘All Accounts’ link, then ‘Education’ tab, and select ‘Custodial Account.’
It’s also possible to
fill out a paper application and submit it to Schwab. Either way, the application will require the details of both the adult and the minor.
If either the adult or the minor later moves out of state, the state specified at the time of application will govern the account in the future in terms of when exactly the account assets must be turned over to the minor. This could be anywhere from 18 to 25.
A custodial account at Schwab can be opened as a robo account. Schwab calls this service Intelligent Portfolios. While there is no annual fee for it, a minimum deposit of $5,000 is required to begin the service.
Investment Choices in the Schwab One® Custodial Account
Schwab’s robo service trades ETFs with low expense ratios from a variety of fund families. Under this automated service, there are no other investment vehicles available.
Self-directed custodial accounts have a much larger list of tradable products. These include fixed-income securities, mutual funds, closed-end funds, stocks (including many OTC stocks), futures, and option contracts.
Schwab also has a global stock service for self-directed accounts that provides access to twelve foreign exchanges in seven local currencies. Trades of foreign stocks, however, do come with commissions. These vary by national exchange. OTC stocks are $6.95 per trade.
Because a custodial account cannot trade on margin, shorting is not possible inside the Schwab One Custodial Account, nor are some option spreads.
Schwab Customer Service
For me, customer service is imperative, and Schwab truly blows it out of the water on this one. 24/7 service is standard at Schwab, not only over the phone, but also through online chat and internal messaging. Whatever you can think to ask regarding your account, they can answer.
For some, customer service is not essential. Everything you ask could be discovered through meticulous sifting online. But for me, being able to have someone walk me through the ins and outs of my account on the phone is a must. And Schwab employees are some of the nicest and most accommodating customer service agents I have ever dealt with.
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Personal Opinions on Schwab
As a former custodial account beneficiary at Charles Schwab, I can offer some inside information. My hunch is that if you are looking for a brokerage account that is easy to manage and track, and intend to execute mostly long-term trades, Schwab is the place for you. On the other hand, if you intend on making frequent trades, there are more optimal solutions, although not all brokerage firms offer custodial accounts.
Learning Resources for Young Investors
Schwab offers a great deal of educational resources on its trading platforms. The website, mobile app, and desktop platform have lots of learning tools. Examples include podcasts, CNBC streaming at no cost, and a treasure trove of articles and videos. Many of these cover basics that new investors will benefit from. Examples include:
- Introduction to Fundamental Analysis
- Options Contract Basics
- Pros and Cons of Various ETF Types
Schwab also publishes a quarterly investment newsletter entitled Onward. It’s available in digital format and has articles that both custodians and minors will find helpful. In the August edition, for example, there is an article about teaching financial literacy to grandchildren.
Other Schwab Accounts for Children
Besides the UTMA and UGMA accounts, Schwab has some other investment accounts that legal minors can benefit from. The hard-to-find 529 College Savings Plan is available at Schwab, and so is the Coverdell Education Savings Account. Schwab also has the Custodial IRA.
All three of these accounts have their own unique tax, contribution, and withdrawal rules, which may differ significantly from a UGMA/UTMA account.
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Schwab Custodial Account Bottom Line
Schwab has one of the best educational platforms in the business. It offers multiple options for new
traders who are looking for a chance to learn the ropes. Buffett once said, “Buy like the market won't
be open for at least 5 years.” Schwab is a good place to do that.
Updated on 10/3/2024.
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