Minor Accounts: Start Saving Early!

May 10, 2021

Summer is a great time for a variety of reasons: nice weather, children are out of school, and, of course, vacation time! But one other important reason many look forward to summer is the ability for the kids to pick up summer jobs and earn some income.

What many parents do not know is that while their child may legally be a minor, they are still able to take their earned income and contribute it into a custodial account, also known as a “minor account.” This is a one way to introduce investing to your children and to encourage savings habits that they will take into the future.

Minor accounts need to have a legal adult listed as the “custodian” of the account. This means that a parent or guardian operates the account on behalf of the minor until they reach the legal age of majority (18 or 21 in most states), at which time the child will take over full control of the account. Even while the custodian is legally operating the account, it is still considered the account of the minor. The custodian is expected to manage the account in the best interest for the minor.

Minor accounts are designed to provide an opportunity for minors to invest money at an early age. The most common kinds of minor accounts available are the UGMA/UTMA accounts or the Minor IRA/Roth IRA.

The UGMA (Uniform Gift to Minor Account) or UTMA (Uniform Transfer to Minor Account) do not have restrictions on what type of money is used to make contributions. That means monetary gifts from family or friends can be put into the account, as well as the child’s earned income. To open this account, the minor must have a legal tax ID, so you cannot create a UGMA/UTMA account for a child before they are born. When compared to a 529 College Savings Account, the UGMA/UTMA account provides more flexibility as the funds do not have to be used for qualified education expenses.

Minor IRAs are very similar to IRAs in the sense that there is a pre-tax IRA (Traditional) and a post-tax IRA (Roth). In contrast to a UGMA/UTMA account, Minor IRAs require that the child have earned income to contribute to the account. These accounts are not eligible to receive gifts unless the child has enough earned income in the year to cover the amount of the gift. While the Minor IRA can be made in either Traditional format or Roth format, the Roth is most often used as the minor is being taxed at their current tax rate, which tends to be lower than what it would be years down the line when they are in the stride of their careers. In both circumstances, these IRAs provide tax-advantaged growth as an incentive to save for retirement.

No matter which option you choose, getting your child, grandchild, niece or nephew started with one of these accounts is a fantastic way to help put them in a position of financial strength from an early age. If you are interested in hearing more about these accounts or if our team can assist in any way, please do not hesitate to reach out at (317) 882-7675.