How to Get Money Out of a Custodial Account
Understand how to effectively withdraw money from a custodial account. Get insights into the process and important considerations.
A custodial account, typically established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), holds assets for a minor’s benefit. An adult, known as the custodian, manages investments and savings on behalf of a child until they reach a specified age. The primary purpose of such accounts is to facilitate saving for a minor’s future needs, such as educational expenses or other significant life events. This article clarifies the guidelines and procedures for accessing funds held within these accounts.
Rules for Accessing Custodial Funds
Access to custodial funds is governed by specific legal frameworks, with the age of majority being a central determinant for when the beneficiary gains direct control. The age at which a minor receives full control of a custodial account, often referred to as the age of termination, can vary from 18 to 21 years, and in some instances, up to 25 years, depending on state law and the specific terms of the account. This age dictates when the custodian must transfer the account’s assets directly to the beneficiary.
Before the beneficiary reaches this age of termination, the custodian holds a significant responsibility as a fiduciary. This means they must manage the account solely for the minor’s benefit. Withdrawals made by the custodian during this period must directly serve the minor’s well-being, such as covering educational costs, healthcare expenses, or other expenditures that enrich the child’s life. Financial institutions typically do not audit the purpose of withdrawals, but the custodian is legally accountable for ensuring the funds are used appropriately. Improper use of funds, such as for the custodian’s personal benefit, constitutes a breach of fiduciary duty and can lead to legal consequences.
Distinctions between UGMA and UTMA accounts influence the rules surrounding fund access and asset transfer. UGMA accounts are generally limited to holding cash, securities, and insurance policies, often with an 18-year termination age. UTMA accounts, on the other hand, offer greater flexibility by allowing a broader range of assets, including real estate and other tangible property, and may permit a later age of termination, potentially up to 25 years in some jurisdictions. The account type and termination age are determined by the state law where the custodian resides when the account is established.
Steps to Initiate a Withdrawal
Initiating a withdrawal from a custodial account involves a series of practical steps. The first step involves identifying the financial institution that holds the custodial account, whether it is a bank, brokerage firm, or mutual fund company. Contacting their customer service or reviewing their online portal will provide specific instructions tailored to their procedures.
Once the financial institution is identified, gathering the necessary documentation is the next step. This typically includes identification for the custodian (or the beneficiary, if they have reached the age of termination), such as a driver’s license or state ID, along with the custodial account number and any other relevant account information. For withdrawals made by the custodian for the minor’s benefit, some institutions might ask for a brief explanation or documentation related to the purpose of the withdrawal. It is prudent for custodians to maintain meticulous records, including receipts, for all expenditures made from the account in case of an audit.
The financial institution will generally require the completion of specific withdrawal forms. These forms typically ask for details such as the amount to be withdrawn, the destination account for the funds (which must be linked to the custodian or beneficiary), and the signature of the custodian or beneficiary. Depending on the institution, these forms can often be submitted through various methods, including secure online portals, mail, or in-person at a branch location. After submission, the processing time for withdrawals can vary, with electronic fund transfers often taking between three to seven business days for the funds to settle and become available in the receiving account.
Tax Considerations for Custodial Account Withdrawals
Income generated within a custodial account, such as interest, dividends, and capital gains, is generally taxable to the minor beneficiary. Specific rules, known as the “kiddie tax,” apply to unearned income above a certain threshold, potentially affecting the tax rate. For the 2024 tax year, the first $1,300 of a child’s unearned income is typically tax-free, and the next $1,300 is taxed at the child’s own tax rate.
Any unearned income exceeding $2,600 for the 2024 tax year is generally subject to the parent’s marginal tax rate, rather than the child’s potentially lower rate. This rule prevents parents from shifting income to their children to take advantage of lower tax brackets. When assets are sold within the custodial account to facilitate a withdrawal, any realized capital gains are considered unearned income and are subject to these kiddie tax rules.
Withdrawals of the principal amount contributed to a custodial account are typically not taxable, as these represent a return of the original gift or transfer. However, any earnings or gains on that principal are subject to taxation. Custodians and beneficiaries should expect to receive tax forms such as Form 1099-INT for interest income, Form 1099-DIV for dividend income, and Form 1099-B for proceeds from brokerage transactions. These forms report taxable events to the Internal Revenue Service (IRS) for accurate reporting on the minor’s tax return, or, in some cases, on the parent’s return if they elect to include the child’s income using IRS Form 8814.