A:

Not directly, no. However, mutual fund investments can be made through a custodial account opened in a minor's name and overseen by a guardian. This custodian holds decision-making power of the account until the child reaches legal age, typically 18 or 21.

How Custodial Accounts Work

While the rules for custodial accounts can vary from state to state, they generally work in the same way. Accounts are usually set up through either the Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), both of which govern how a minor's account is handled and controlled. Most states offer UTMA accounts, which can save on taxes. The first $950 in earnings is not taxed in UTMA mutual fund accounts. The next $950 is taxed at the minor's tax rate, and annual earnings over $1,900 are taxed at the parent’s tax rate. In addition to mutual funds, UGMA or UTMA accounts can include a variety of investment options to diversify the portfolio.

These accounts are considered irrevocable once they are set up. Account custodians can choose the mutual funds and alter investments, but any money or assets contributed cannot be taken back. While custodians are typically parents, anyone can be designated to manage the investments. Custodial accounts have no income restrictions, and anyone can make contributions to the account at any time.

After reaching legal age, the child may choose to use the account for any purpose. Many families use UGMA or UTMA accounts for college expenses, but since the assets are under the child’s name, they may affect his eligibility for financial aid or limit the amount of aid the child receives.

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