Yes, you can open a brokerage account for your child, but the account structure depends on their age

You can open an investment account in your child's name starting at birth, but the rules change based on whether your child is under 18 or older. For children under 18, you will open a custodial account — a legal structure where you control the money until they reach the age of majority (18 or 21, depending on your state). For teenagers 18 and older, they can open their own account directly with a brokerage firm, though you may still want to discuss it with them first.

The two main types of custodial accounts are the Uniform Gifts to Minors Act (UGMA) account and the Uniform Transfers to Minors Act (UTMA) account. Both let you invest money on your child's behalf. The difference is small: UTMA accounts can hold real estate and other property types, while UGMA accounts typically hold only cash, stocks, bonds, and mutual funds. Most families use UTMA because it is more flexible.

Key Takeaways

  • Custodial accounts let you invest money for children under 18, and you control the account until they reach the age of majority in your state.
  • UTMA accounts are the most common choice because they accept stocks, mutual funds, bonds, and other investments without the restrictions of UGMA accounts.
  • Money in a custodial account belongs to your child for tax purposes, which can lower your family's overall tax bill if your child has little or no income.
  • Your child gains full control of the account when they reach 18 or 21 (depending on your state), and you cannot prevent them from withdrawing the money.
  • Teenagers 18 and older can open their own brokerage accounts without a parent or guardian, though some brokerages have their own age or funding requirements.

How custodial accounts work and who controls the money

When you open a custodial account, you are the custodian — the adult who manages the account and makes all investment decisions. Your child is the beneficiary — the person who owns the money legally, even though they cannot touch it yet. You can deposit money, buy and sell investments, and reinvest dividends without asking your child's permission.

The account is held at a brokerage firm like Fidelity, Charles Schwab, E*TRADE, or Vanguard. Each firm has its own process for opening a custodial account, but all require proof of your identity, your Social Security number, your child's Social Security number, and your state of residence (because the age of majority varies by state). Some brokerages let you open the account online; others require you to visit a branch or call.

You remain the custodian until your child reaches the age of majority — 18 in most states, but 21 in a few (including California, Nevada, and Utah). At that point, the account automatically transfers to your child's full control. You cannot extend the custodianship, and you cannot prevent your child from withdrawing the money once they reach that age.

Tax benefits and how they work

Money in a custodial account is taxed in your child's name, not yours. This can save your family money if your child has little or no income of their own. For 2024, the first $1,450 of investment income your child earns is tax-free (this amount changes each year). The next $1,450 is taxed at your child's rate, which is typically lower than yours. Income above $2,900 is taxed at your rate — a rule called the kiddie tax — but most families do not reach that threshold.

This tax structure makes custodial accounts useful for long-term investing. If you invest $5,000 per year starting when your child is born, the account grows tax-efficiently for 18 years. By the time your child turns 18, the tax-free and low-tax growth can add up significantly.

You will need to file a tax return for your child if their investment income exceeds the annual threshold, even if they have no other income. Your brokerage will send you a Form 1099 each January showing how much income the account earned. A tax professional can help you determine whether your child needs to file and how to report the income.

What you can and cannot do with custodial account money

Money in a custodial account must be used for your child's benefit. This is broad — it includes education, medical care, housing, food, and other living expenses. However, you cannot use custodial money to pay for things you are already legally required to provide, like basic food and shelter. The IRS watches this closely because some parents try to use custodial accounts to avoid taxes on their own income.

You can withdraw money from the account to pay for your child's college tuition, private school, summer camp, a car for school, or medical bills. You cannot withdraw it to pay your mortgage or your own expenses, even if the money benefits your child indirectly. If you misuse custodial funds, the IRS can reclassify the income as yours and assess back taxes and penalties.

When your child turns 18 (or 21 in some states), they own the money outright and can use it however they want — including spending it on things you would not approve of. This is a real risk of custodial accounts. If you want more control over how the money is used, a trust set up by an attorney offers more flexibility, though it costs more to establish and maintain.

Opening a custodial account: steps and what you need

Start by choosing a brokerage. Most major firms offer custodial accounts with no minimum deposit, though some have account minimums of $500 to $1,000 if you want to invest in mutual funds. Fidelity, Charles Schwab, Vanguard, and E*TRADE all have straightforward online processes.

Gather these documents: your government-issued ID, your Social Security number, your child's Social Security number, and your state of residence. Some brokerages ask for your child's date of birth and address. A few may ask for proof of your relationship to the child (a birth certificate works).

Go to the brokerage's website and look for "open a custodial account" or "UTMA account". The online form will ask you to confirm that you are the parent or legal guardian, that you understand the account will transfer to your child at the age of majority, and that you agree to the firm's terms. The process usually takes 10 to 15 minutes. Some brokerages will fund the account immediately; others may take one to three business days to verify your information.

Once the account is open, you can deposit money by linking a bank account, transferring funds from another investment account, or mailing a check. You can then buy stocks, mutual funds, exchange-traded funds (ETFs), or bonds depending on what the brokerage offers.

Custodial accounts versus other ways to save for your child

A custodial account is not the only way to invest for your child. A 529 college savings plan is designed specifically for education and offers tax breaks if the money is used for tuition, fees, room and board, or books. Money in a 529 stays in your control longer — you can change the beneficiary to another child or use it for graduate school. However, if you withdraw money for non-education purposes, you pay taxes and a 10% penalty on the earnings.

A Coverdell Education Savings Account (ESA) is another education-focused option. It has lower contribution limits ($2,000 per year) but more investment flexibility than a 529. Like a 529, it penalizes non-education withdrawals.

A trust set up by an attorney gives you the most control. You can specify exactly when and how your child receives the money — for example, half at 25 and half at 30. Trusts cost $1,000 to $3,000 to set up and require ongoing paperwork, but they prevent your child from accessing large sums at 18.

A custodial account is best if you want simplicity, low cost, and tax efficiency, and you are comfortable with your child controlling the money at 18. A 529 is better if education is your main goal. A trust is better if you want to delay your child's access to the money.

What happens when your child turns 18

On the date your child reaches the age of majority in your state, the custodial account automatically becomes their account. The brokerage will send you and your child notice of the transfer. Your child can then log in, see the balance, and make trades or withdrawals without your permission.

You will no longer receive statements or have access to the account. If your child wants you to help manage it, they can give you power of attorney or add you as an authorized user, but this is their choice, not yours.

Your child will receive all tax documents (Form 1099s) going forward. If they withdraw money, they are responsible for reporting it on their own tax return. If they leave the money invested, the account continues to grow in their name.

Frequently Asked Questions

Can I open a custodial account if I am not the biological parent?

Yes. Grandparents, aunts, uncles, and other relatives can open custodial accounts for children. You must be a legal adult and have a valid ID. The child's parent or legal guardian does not have to give permission, though it is good practice to tell them. Only one custodian can control the account at a time, so if multiple family members want to contribute, they can deposit money into the same account or open separate ones.

Does a custodial account hurt my child's chances of getting financial aid for college?

Yes, it can. Money in a custodial account is counted as your child's asset on the Free Application for Federal Student Aid (FAFSA). Assets in your child's name reduce their financial aid more than assets in your name. If you are planning to pay for college with financial aid, a 529 plan in your name is often a better choice because it is treated more favorably on the FAFSA.

What if my child is 18 or older — can they open their own account?

Yes. Teenagers 18 and older can open a regular brokerage account directly with any major firm without a parent or guardian. They will need their own ID and Social Security number. Some brokerages have their own age limits (a few require you to be 21), so check the firm's website first. Your 18-year-old can also open a Roth IRA if they have earned income from a job.

Can I change the beneficiary of a custodial account to a different child?

No. A custodial account is set up for one specific child and cannot be changed. If you want to invest for another child, you must open a separate custodial account in their name. This is different from a 529 plan, which lets you change the beneficiary to a sibling.

What if I die before my child reaches the age of majority?

The custodial account will pass to your child when they reach the age of majority, regardless of what your will says. If you want someone else to manage the money until your child is older, you need a trust, not a custodial account. Talk to an attorney about setting up a trust if you have young children and want to ensure the money is managed carefully after you die.