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Source: mint.intuit.com

Apache is functioning normally

I can only imagine what would have happened if my parents would have given me access to a big chunk of money when I was still young.

I used to be really good at blowing my money on crap that I didn’t need, so I’m sure anything they would have saved would have been gone in an instant.

Sound familiar for any of you?

This is just one of the many reasons why custodial accounts were created.

If you’re scared that your child will blow through their savings, here’s what you need to know about custodial account rules.

Basically, a custodial account is established to protect the financial assets given to a minor child. In most cases, the account is created by the child’s parent or legal guardian for one of two functions.

Some custodial accounts can be established to make sure the child has sufficient resources throughout his or her adolescence. Other custodial accounts are created to cover educational expenses after high school graduations.

Additionally, the account can be established to provide a good financial foundation during the child’s adult life.

Custodial Account Rules

While there are multiple reasons that a parent or legal guardian may have to open a custodial account, the process to begin is the same. The account can be opened at a brokerage firm, a mutual fund company, bank or any other type of financial institution. An adult is assigned to manage the account until the child reaches the age requirement for to have full access to the account.

Depending on state legislation, the age range to grant access can be between 18 and 21 years. This is known as the age of majority and the age can be over 21 based on state legislation and specific circumstances.

Additionally, the custodian of the account must approve any transactions that the minor may want to conduct on the account. Investments are allowed but must be limited to mutual funds or similar financial products.

Role of the Custodian

Custodial accounts originated with the Uniform Gifts to Minors Act (UGMA) of 1956 where a custodian is designated to manage the account until the child reaches adulthood. The parent or legal guardian can act as the custodian or name another adult to serve in this capacity. Generally, the custodian’s role is to manage the assets of a custodial account to buy, sell and/or reinvest earnings. If necessary, the custodian can withdraw money from the account when it benefits the child.

The law requires that all assets in a custodial account be used only to benefit the minor child.

Clearly, the expectation is that the custodian will never use the money for personal interests. Paying expenses that are unrelated to the child’s interest is prohibited.

If the custodian is also the legal guardian or parent, they should get expert financial advice on the appropriate use of the funds. There are allowed distributions that may apply. In general, the account cannot be used to pay for daily expenses that the guardian or parent is legally obligated to cover.

What Happens to Investment Income?

The dividends, interest and earnings from investment income is considered income for the child, and the rules around this have recently changed. Currently, when the child is under 18, any unearned income over $2,200 is subject to the “Kiddie Tax”. This rule also applies if the child is under 24 and a full-time student.

Here’s how it breaks down. For the 2020 tax year, the child’s unearned income under $1,100 is not taxed; the next $1,100 is taxed at the child’s tax rate, which can be very low, and any unearned income in excess of $2,200 is taxed at the parents’ tax rate.

Ownership of the Custodial Account

The assets of the custodial account are owned by the child for whom the account was created. While it is true that the child does not control the account until he or she meets the age requirement, the child is the legal owner from the start. Typically, assets are placed into the account as a gift for the child.

Legally, this completes the transaction and a person cannot take the property back at a later date. The same rule applies to any income that generates from the assets, i.e. stocks, mutual accounts.

529 Plans Vs. Custodial Accounts

Establishing savings plans for your kids basically comes down to two options: custodial accounts or 529 plans.  There are many differences between the two, but here’s the main ones I point to people who are interested:

  1. With 529 plans, the owner (usually the parent) is always in charge of the money even after the child turns 18.  This is huge for a lot of parents.
  2. The 529 plans must be used for college or college related expenses (think room and board, books, supplies). Custodial account has no restriction on what the money can be used for.
  3. If the money inside the 529 plan is used for the above mentioned expenses, the owner will not have to pay any income tax when cashing out the funds.
  4. Custodial accounts offer a lot more flexibility with the investment choices (brokerage, high yield savings, etc.). 529 plans are usually mutual funds that are pre-selected by the states plan that you choose.

Overall, if saving for college is your prime goal, I would suggest the 529 plan over the custodial account.   If you don’t want your child to feel like the money has to be used for college, then go with the custodial account.

Termination of the Custodial Account

Custodial accounts terminate when the child reaches the specified age according to state law. The type of transfer may also determine when the account terminates. A parent or legal guardian could designate an age that is different from state law.

For example, state law may require account termination when the child turns 18 years old. However, the creator of the account may specify termination at age 21. Once the account terminates, the child has free reign on how to use the assets of the account.

There are also legal guidelines if the child dies before the account terminates. Typically, the custodian cannot allocate how the assets are distributed. The custodial account becomes part of the child’s estate and must be distributed according to estate laws.

Source: goodfinancialcents.com

Apache is functioning normally

By Peter Anderson 2 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited November 8, 2012.

Lending Club has been around for a few years now, and as time goes on, more and more people are coming around to peer to peer lending, and agreeing that it may be a legitimate part of a diversified portfolio.

The technology behind Lending Club has continuously shown improvement during the time I’ve been using the site, and I think they’ve got an innovative idea, and a great platform that will only continue to improve.

Apparently some people in high places agree because it was recently announced that Lending Club was honored as a World Economic Forum 2012 Technology Pioneer!

The World Economic Forum annually selects approximately 30 visionary companies in the fields of information technology and new media, energy/environment and life sciences/health,” said Olivier Schwab, director, Head of Technology Pioneers, World Economic Forum. “The selected Technology Pioneers represent the latest generation of innovators, poised to have a critical impact on how business and society work.”

Lending Club was honored in part because of their innovation in the lending and banking industries, which they are helping to change.

All I know is that in the time that I’ve been using Lending Club I’ve shown great results with almost 11% returns in a time when the stock market has been down, and high yield savings accounts are showing tiny interest rates. In short, I think it’s a great way to diversify your investments into something that won’t show as much volatility during rough economic times.

Interested in my original Lending Club Review? check it out below.

Check out my original Lending Club review

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Returns Increase To 10.93%

My Lending Club investments have continued to improve, and they’re now pushing 11% net annualized return.

    1. Net Annualized Return of 10.93%: Up from 10.76% in August, 10.53% in June and 10.13% before that. That puts me in the 57th percentile. My returns are higher than 57% and lower than 43% of all investors. So that means I’ve reached my goal of doing better than 1/2 of other investors, so now it’s on to doing better than 75%!
    2. Number of defaults remains at zero: Despite all odds I’m still showing zero defaults on my account, despite having given out over 100 loans so far. I’m actually surprised I haven’t had at least one or two. I do currently have one loan that is late, with partial payments coming in the past couple of months.  The funny thing is that the late loan is a Grade B loan, not one of the lower grade ones. Go figure.
    3. Sixteen loans have been paid off early: Nine were A grade loans,  three were C grade loans, three were grade B and one grade E. Looks like grade A loans, while they’re more likely to be paid back, may also be more likely to pay of early – reducing returns.
    4. My account balance still going up: I currently have $2,607.17 in my account, with $825.99 of that ready to invest. I’ll be the first to admit that the last couple of months I haven’t added many loans as I’ve been distracted by other things. I’ll probably be trying to invest the money sitting dormant right now.
    5. I’m still diversified by investing across a large number of loans: I’ve got 111 loans, with no more than $25 in each loan. That way if I do have defaults, while my return may go down, my risk will be minimized. Lending Club noted earlier this month, that 100% of their investors who have invested 800 notes or more had positive returns. Not too shabby, not everyone in the stock market can say that!

So it looks like my strategy I laid out a few months ago of adding more risky C, D and F grade loans is paying off so far.

Risky Loans Still Defying The Odds With Zero Defaults

I mentioned a while back that I was changing my Lending Club investing strategy and starting to invest in more higher risk lower grade loans. The rationale was that you can still find people that are relatively good risks, but who have bad credit. Most of these are going to be loans from people who have high incomes and steady employement, but for one reason or another have had a hiccup in their credit causing them to be lower grade.

I’ve invested in a bunch of these Grade C-E loans over the past year, and since doing so my returns have steadily climbed. I would have expected to see a few defaults in there, but so far I’ve been investing in the riskier loans for about a year now, and none of them have defaulted yet. Would you think some of them will still default despite my early success? Possibly. But I’m hoping my gamble on those with steady jobs and high incomes will mean I wont’ see many defaults.

Here’s where my NAR stands now, getting better every month. Now standing at 10.93%. I’m hoping I can break through that 11% threshold soon!

Lending Club Strategy

Here’s the basic strategy I’ve been using with Lending Club over the past couple of years.

  • Less than $10,000: I believe I’ll still be sticking with mostly loans below $10,000. Lower amounts mean higher likelihood of payback of the loan.
  • Zero delinquencies: Again, I may fudge slightly on this one, but I still want it to be very few or zero delinquencies.
  • Debt to income ratio below 20-25%: I like to invest in loans where the borrowers have a lower DTI ratio, and preferably have higher incomes. I’ll try to keep this as is.
  • Borrower answers to investor questions: Because of privacy and liability concerns you can no longer ask whatever question you want from borrowers, but only ask from a pre-set list of questions. It’s still good enough for me I think, although I’d prefer being able to ask specific questions.

So that’s what I’m doing with my Lending Club portfolio right now, and how I’m investing.

Not ready to invest, but looking to consolidate debt or pay off a high interest credit card? You might want to consider borrowing from Lending Club. Check out my post on borrowing from Lending Club.

Are you currently investing in Lending Club? How are your returns looking? Tell us in the comments!

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Source: biblemoneymatters.com

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