There are two types of custodial account. The first is an account that is managed for a minor. The funds are handled by an adult guardian for someone who is under age of 18 or 21, depending upon state legislation. The second is a retirement account which is managed by a custodian for eligible employees. In both cases someone other than the eventual beneficiary handles the business end of the account.
The account is set up as a way to provide funds for the child or employees in the future. By placing funds into such an account the adult, or employer, can invest for education or retirement in an organized fashion. Furthermore, if money is needed for specific expenses, a portion of it can be withdrawn for specific expenses.
The biggest benefit of a custodial account is perhaps of the fact that the custodian still maintains control of the funds within the account. Sometimes, as in the case of a minor, details such as investment decisions are better left to a responsible adult.
Establishing a custodial account early in a child’s life allows parents and other relatives to contribute often, reducing the pressure of paying for higher education later on. Furthermore, since the adults maintain control over the funds, they can direct where the investments are made.
Investments in a custodial account are often limited to specific types of funds – for example mutual funds. The products purchased must be offered by regulated investment companies. You can establish a custodial account with a bank, brokerage firm or mutual fund company.