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This wrinkle is known informally as the "kiddie tax." Since most children are in a lower tax bracket than their parents, many parents prefer to file a return for the child and pay the tax at the lower rate. Custodial brokerage accounts can help you set your child up for financial success.

These taxes are generally charged to the giver, not the recipient.

See how you can claim y…, With taxes likely to rise in the coming decades, the normal methods of providing a financial legacy for our family could be heavily taxed.

Securities in your account protected up to $500,000. The Internal Revenue Service and the federal government have some firm rules and requirements when it comes to the income a custodial account earns. Your child is liable for any resulting taxes, although in some cases you can step in and assume responsibility yourself.

And each kind has its own upsides and drawbacks. Acorns Visa™ debit cards are issued by Lincoln Savings Bank, member FDIC for Acorns Spend account holders. For the average recipient, the 2021 monthly increase won't even cover a fill-up at the gas station — but it beats nothing. NASDAQ data is at least 15 minutes delayed. See the Instructions to IRS Form 8615 for the calculations. Once a child assumes ownership of his or her custodial brokerage account, he or she can use the money for anything—from educational expenses to a down payment on a home. Any hypothetical performance shown is for illustrative purposes only. Your only role is to manage the account for her until she reaches the age of majority.

Only purchases made with a funding source linked to your Acorns account with the feature active are eligible for Round Up investments. While you can technically withdraw money from a custodial account before your child reaches the age of majority, you can only do so for the direct benefit of the child. Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing.

The child will probably owe some tax, and the Kiddie Tax rules may make it higher (see below). Please read the prospectus carefully before you invest. Under some circumstances, you can save yourself the aggravation of having to prepare a separate tax return for your child by claiming the income from her custodial account on your own return. There may be exceptions that can vary from situation to situation and state to state. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.

What Percentage Can You Make Before You Cannot Be Claimed on a Parent's Income Tax?→, Money Tips for New Parents for Your Baby's College Fund→.

These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm. You can use money from the custodial account for educational expenses, but you can also use it for other expenses to benefit the child, such as travel, camp, tutoring or a computer. Your child's savings are usually taxed at your rate.

You can also opt for predesigned diversified mixes, like those you’d find in an Acorns portfolio. If you’re the custodian, you will be responsible for filing tax forms on your child’s behalf for any gains and ensuring taxes are paid. You should consult a tax professional (like an accountant) for answers to specific questions about your specific tax needs.

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