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A custodial account is one of the simplest ways to start investing for your child — but it’s not always the best option.
These accounts let you save and invest money on behalf of a minor, with full control transferring to your child when they reach adulthood. That flexibility makes custodial accounts popular, but it also comes with trade-offs around taxes, financial aid and control.
Most custodial accounts are investment accounts — also known as custodial brokerage accounts — that allow you to invest in stocks, ETFs and other assets for your child.
In this guide, we’ll break down how custodial accounts work, the differences between UGMA and UTMA accounts and when they make sense compared to options like a Roth IRA for kids or other strategies.
Not sure which account is best? See our full guide to investing for kids.
What is a custodial account?
A custodial account is a financial account opened by an adult for a minor. The child owns the account, but a parent or guardian manages it until the child reaches the age of majority.
Who owns it: The child
Who manages it: A parent or guardian
What it holds: Investments like stocks, ETFs or other assets
When control transfers: Typically age 18 or 21, depending on the state
Main benefit: Simple way to invest for a child with no contribution limits
How custodial accounts work
When you open a custodial account, you’re setting aside money or assets that legally belong to your child.
As the custodian, you manage the account — choosing investments, making contributions and handling withdrawals — but all decisions must benefit the child.
Once your child reaches the age of majority, the account transfers to them completely. At that point, they can use the money for any purpose, regardless of your original intent.
UGMA vs UTMA accounts
The two main types of custodial accounts are UGMA and UTMA accounts. Both allow you to transfer assets to a minor, but they differ in what they can hold.
Most custodial brokerage accounts today are structured as UGMA or UTMA accounts depending on your state.
Pros and cons of custodial accounts
Pros
Simple to open: Easier and cheaper than setting up a trust, with most brokers offering quick online applications.
No contribution limits: You can contribute as much as you’d like, making it easier to build a larger investment over time.
Flexible use: Funds can be used for anything that benefits the child, not just education or retirement.
Wide investment options: Invest in stocks, ETFs, mutual funds and other assets depending on the provider.
Cons
No tax advantages: Earnings may be subject to the kiddie tax, which can reduce overall returns.
Impacts financial aid: Assets are counted as the child’s and can reduce eligibility for need-based aid.
Irrevocable: Once you contribute, the money legally belongs to the child and can’t be taken back.
Loss of control: The child can use the money however they want once they reach adulthood, even if it wasn’t your original intent.
How custodial accounts are taxed
Custodial accounts are subject to what’s known as the “kiddie tax.” This means a portion of the child’s investment income may be taxed at the parent’s rate.(1)
Generally, lower levels of unearned income are taxed at the child’s tax rate, while higher amounts may be taxed at the parent’s rate.
The exact thresholds and tax rates can change, so it’s worth checking current IRS guidance or speaking with a tax professional.
Custodial account vs Roth IRA vs 529 plan
Custodial accounts aren’t the only way to invest for a child. Here’s how they compare to other common options:
Account type
Best for
Main tax benefit
Key limitation
Custodial account
Flexible investing for a child
No special tax advantage
Assets may affect financial aid, and the child gains full control at adulthood
If your child has earned income, a Roth IRA may offer stronger long-term tax benefits. But if you want flexibility in how the money is used, a custodial account may be a better fit.
When a custodial account makes sense
A custodial account may be a good option if you:
Want a simple way to invest for your child
Don’t need tax advantages tied to retirement or education
Want flexibility in how the money is used
However, if your child has earned income, a Roth IRA may offer better long-term benefits. And if you’re saving specifically for education, a 529 plan could be more tax-efficient.
What should you invest in?
For most kids, simple and diversified investments are the best place to start.
Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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