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Custodial account - any advantages over a mutual fund that "I know" is my kid's money?


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My wife and I have been setting aside money our daughter received when she was born, on birthdays, etc., plus a little extra from us, for the beginnings of a fund for college and a wedding (hopefully in that order :))

Right now it's just sitting in an online money market, making crap interest. It was suggested to us that we put it in a custodial account instead. I'm totally on board with putting it into some kind of mutual fund, since we have 15 years before there should really be any need for it.

But, is there any reason whatsoever to put that money into a "custodial account" instead of just buying into a mutual fund that I know is hers? Two drawbacks of the custodial account that immediately jump to mind are 1) it puts an artificial limit on how that money can be used. Our rainy day fund is where we want it to be, and things would have to be extremely desperate for us to have to raid that account. But even though I don't foresee any emergencies, why deny yourself flexibility? and 2) if this is to be used for college, under current rules anyway, putting the money in her name is dumb because it limits eligibility for financial aid, since in their formulas you're expected to contribute a much larger percentage of accounts in the kid's name than accounts in the parents' name.

Are there tax or other benefits to having a custodial account that offset those drawbacks?

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No one is responding because you have already made up your mind.

But I am not sure if their is any reason for you to have that type of account.

I wouldn't say I've made up my mind. I am not too knowledgeable about these things. If there's something I'm missing, I could easily be swayed. If I know all the pertinent things there are to know, then I've made up my mind

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I might consider an ETF versus a mutual fund. Long term, either one should do better than a money market... although short term you could actually lose some equity. ETF's trade like stocks, meaning you don't have to wait til the end ofthe day to buy or sell em and fee issue is kinder. Some mutual funds can have pretty high maintance fees (esp. on down years)

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If the money is earmarked primarily for college, you should look into a 529 plan. Money you put into these plans is tax deductible when you deposit it (up to $2,000/year/Georgia resident for each child). Once the money is in there, the earnings are not taxed, and as long as the money is used for college expenses, you are not taxed on capital gains when you withdraw it. TIAA-CREF is the managing service and they are very respectable. You would have your choice of what type of fund to put the money in (age-based, fixed income, stocks, etc).

Qualifying educational expenses: Any college/university, tuition, books and I believe room & board.

Once you open up the account you can have automatic monthly withdrawals (my recommendation) removed from your checking account each month, with amounts as low as $15.

Georgia 529 plan website: http://www.path2college529.com/

Good luck,


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