Custodial Accounts (UGMA & UTMA): How They Work and When to Use Them

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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.

UGMA accounts

Uniform Gifts to Minors Act (UGMA) accounts allow you to transfer financial assets like cash, stocks, bonds and mutual funds.

UTMA accounts

Uniform Transfers to Minors Act (UTMA) accounts are more flexible and can hold a wider range of assets, including real estate, art and other property.

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
Roth IRA for kids	Tax-free retirement savings	Tax-free growth and qualified withdrawals	The child must have earned income to qualify
529 plan	Education savings	Tax-free growth for qualified education expenses	Best used for education, not general spending

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.

Many parents choose broad market index funds or ETFs, which spread risk across many companies and focus on long-term growth.

If you prefer a hands-off approach, you could also consider robo-advisors, which automatically manage a diversified portfolio.

Bottom line

A custodial account is one of the easiest ways to start investing for your child, offering flexibility and a wide range of investment options.

But it’s not always the most tax-efficient choice. Before opening one, consider how it compares to options like a Roth IRA or 529 plan.

Still deciding? Compare all your options in our guide to investing for kids.

Frequently asked questions

• Can I withdraw money from a custodial account?

  Yes, but withdrawals must benefit the child while the account is under custodial control.

• Who pays taxes on a custodial account?

  The child is responsible for taxes on earnings, though a parent typically handles the filing.

• Can a custodial account be used for anything?

  Yes. Once the child takes control of the account, they can use the funds for any purpose.

• Is a custodial account better than a Roth IRA?

  It depends. Custodial accounts offer flexibility, while Roth IRAs provide tax advantages if the child has earned income.