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.
Does a custodial account offer tax benefits?
Custodial accounts may not offer the tax benefits of 529 plans, but they can be used to fund expenses that 529 plans don't cover. If you want to set aside money for college expenses that aren't covered by an Education Savings Account (ESA) or 529 plan, a custodial account might help.
What are the benefits of a custodial account?
The main benefit of a custodial account is that parents can take advantage of the gift tax exclusion to fund the account while maintaining control over how the money is invested and spent while the child is a minor (as long as it's for their benefit). However, the exclusion requires that the money be an irrevocable "no strings attached" gift.
