What type of custodial investment account is the best for a dependent child?

I am considering setting up a custodial stock account for my 2 year old. I'm seriously considering DRIP type investment.





What type of account is most beneficial in terms of tax benefits, for both parents and children?





Is it better to own a separate DRIP account until the child reaches the adult age and then gift them the account or use it to pay for the education?





Thanks|||Keep the money in your name. I would avoid opening a UGMA or UTMA account, when your child reaches legal age (18 or 21) they can go pull the money out and spend it on anything they desire. We all hope our kids will grow up and be responsible but you never know.





If You want to save for college.


I would suggest opening a 529 college savings plan. These accounts allow the money invested to grow in mutual funds on a tax favored basis. No capital gains taxes, if the money is used for higher education it remains tax free. The account would be in your name with the child as a beneficiary. One nice thing is that once your child turns 18 the account still stays under you control. If your child wins a scholarship you will be able to withdraw money from the 529 equal to the scholarship penalty free and you would just pay taxes. If you remove the money from the 529 for non qualified expenses you would pay taxes and a 10% IRS penalty. If your child never goes to college you can change the beneficiary even to yourself. These accounts don't have much of a downside. I would recommend you checking out the 529 offered by The American Funds or the plan offered by your state.





I also highly recommend reading The Truth About Money by Ric Edelman





I would also recommend mutual finds over individual stocks. Mutual funds allow the small investor to have a diversified portfolio with professional money management. Without being a professional investor it is hard to beat a good mutual fund.|||gift it when the time comes...