Does a custodial account affect financial aid?

Custodial accounts can have a heavy impact on financial aid. Because the money in a custodial account is your child's asset and not yours, federal financial aid formulas consider 20% of the money available to pay for college. Compare this to 529 plans, which are given more favorable treatment for financial aid.

Do you include custodial accounts on FAFSA?

Yes. A Custodial account may impact an application for college financial aid. If the student owns the account, it counts toward their own net worth. If their legal parent(s) own the account, it counts toward the net worth of the parent(s).

Does a child's savings account affect financial aid?

The FAFSA formula assesses relevant parent assets at a maximum of 5.64%. The federal formula assesses child assets, which would include all custodial accounts as well as a child's own savings/checking, at 20%.

What is the disadvantage of custodial brokerage account?

But the biggest downside for many parents is the fact that custodial accounts require the custodian to turn over the account to the child at whatever age the state in question says is the legal age of majority.

Does an UTMA account affect financial aid?

Student assets in an UGMA or UTMA account reduce eligibility for need-based financial aid by 20% or 25% of the asset value, much more than the maximum 5.64% reduction for a 529 plan account that is owned by a dependent student or the student's parent.

Should You Open an UTMA Account For Your Child?

How is a custodial account reported on FAFSA?

A custodial 529 plan of a dependent student is treated as an asset of the parent on the Free Application for Federal Student Aid (FAFSA). This means that a custodial 529 college savings plan for a dependent student has a low impact on financial aid eligibility.

What is the disadvantage of UTMA?

Cons. Greater impact on financial aid. Because they're held in the name of the child, UTMA/UGMA accounts hurt financial aid eligibility more than comparable 529 plans. Money becomes the child's at majority.

What is the difference between a custodial account and a UTMA account?

A UGMA account is limited to purely financial products such as cash, stocks, mutual funds, bonds, other securitized instruments and insurance policies. A UTMA account, on the other hand, can hold any form of property, including real property and real estate.

Do I have to pay taxes on my child's custodial account?

A portion (up to $1,250 in 2024) of any earnings from a custodial account may be exempt from federal income tax, and a portion (up to $1,250 in 2024) of any earnings in excess of the exempt amount may be taxed at the child's tax rate, which is generally lower than the parent's tax rate.

Should you open a custodial account for kids?

Yes. With a custodial account, you can explain that the money belongs to the child and that you are investing it for him or her. By showing a child the investment mix, types of assets, and performance reports, you can educate him or her about investing.

Where should I put money to avoid FAFSA?

Use Reportable Assets to Pay Off Debt and Other Obligations

So, using a reportable asset to pay down non-reportable debt, such as credit card debt and auto loans, will make the reportable asset disappear from the perspective of the financial aid formula.

Should I empty my savings account for FAFSA?

The student should keep no cash or cash equivalents saved in their name. Students are punished by the FAFSA for saving any cash. The FAFSA will specifically ask “As of today what is the cash balance of checking, savings…” accounts for the student.

What assets are not counted for FAFSA?

Cars, computers, furniture, books, boats, appliances, clothing, and other personal property are not reported as assets on the FAFSA. Home maintenance expenses are also not reported as assets on the FAFSA, since the net worth of the family's principal place of residence is not reported as an asset.

Does the FAFSA check parent bank accounts?

Verification doesn't necessarily check the student's or parent's bank accounts. Rather, the school will ask for documentation to clarify information provided in the form. These documents can include income tax returns, W-2 forms, and 1099 forms.

Which is better 529 or UTMA?

529 plans have a more favorable tax and financial aid impact and provide the parent with more control. UGMA and UTMA accounts provide more flexibility in how the funds can be used. Overall, most people will find a 529 plan to be a better option.

What accounts count towards FAFSA?

Assets considered for the FAFSA include: Money, which includes current balances of any cash, savings, and checking accounts. Non-retirement investments, like brokerage accounts, real estate (other than your primary residence), CDs, and stock options. Trust funds.

What are the pros and cons of a custodial account?

Custodial accounts come with specific benefits and drawbacks. The main advantage is the account's flexibility. Another benefit is that custodial accounts are relatively inexpensive compared to trusts. The chief disadvantage is that custodians lose control of the money once the minor reaches the age of majority.

Are custodial accounts a good idea?

Final Verdict. Custodial accounts can be a great vehicle for saving for your children's future. With no contribution limits and the ability to make withdrawals at any time, custodial accounts can be a flexible and convenient way to save.

Who owns the money in a custodial account?

Assets and income in a custodial account belong to the minor beneficiary (the child). Minors with unearned income such as interest, dividends, and capital gains, generally have to file an income tax return if, among other things, their unearned income is over $1,300 (in 2024).

Who pays taxes on custodial accounts?

Unlike 529 plans and ESAs, custodial accounts are subject to the so-called "kiddie tax." This tax rule applies to unearned income (i.e., investment income) up to a certain threshold. Over that threshold, the child will pay taxes at the parent's tax rate.

What happens to custodial account when child turns 18?

Any deposit or gifts made to the account is irrevocable, meaning it cannot be changed or reversed. All of the account's holdings pass, irrevocably, to the minor at the age of majority. In contrast, many college savings plans, such as a 529 account, allow parents to retain control of the funds.

How do I get money out of my custodial account?

Gifts are irrevocable: Contributions to a custodial account are considered irrevocable—meaning you can't get that money back—and funds can be withdrawn by the custodian only to pay for expenses that would directly benefit the child before the age of majority.

Can parents remove money from UTMA?

Key Takeaways. Under the Uniform Transfers to Minors Act (UMTA), money deposited into a UTMA account typically can't be withdrawn except by the child at the appropriate age. A UTMA custodian may be able to use some custodial assets for the "use and benefit of the minor."

Can I close my child's UTMA account?

The UTMA account belongs to the child, and the funds are irrevocable. You cannot close a UTMA account like your own account or a living trust. However, when the child reaches the age of majority, they may do whatever they want with the funds, including transferring the funds to another account.

Is UTMA a good idea?

We just talked about how UGMAs / UTMAs are not a great choice if you're planning to apply for financial aid. And they're not a great choice if you're planning to save a lot of money because there's no tax advantage above $2,100 of unearned income. Most people saving for college do one - or both - of these things.