A custodial account holds money or investments in a child's name, managed by an adult until the child reaches the age of majority

A custodial account is a legal container for assets—cash, stocks, bonds, mutual funds—that belongs to a minor but is controlled by an adult (the custodian) until the child turns 18 or 21, depending on your state and the account type. The child owns the money; the adult manages it. When the child reaches the age set by law, they take full control and can do whatever they want with it.

The account is opened in the child's name and uses their Social Security number. Banks, brokerages, and investment firms all offer custodial accounts. The custodian—usually a parent, grandparent, or other family member—makes deposits, decides where the money is invested, and handles withdrawals. The custodian cannot take the money for themselves, but they can spend it on the child's behalf for things like education, medical care, or living expenses.

Custodial accounts are common for inheritances, gifts from relatives, earnings from work, or money parents want to set aside for a child's future. They are simpler than trusts and require no court involvement to open or manage.

Key Takeaways

  • A custodial account holds assets in a child's name but is managed by an adult until the child reaches 18 or 21, depending on state law and account type.
  • The two main types are UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts, with UTMA allowing more types of property to be transferred.
  • When the child reaches the age of majority, they gain full control of the account and the custodian's authority ends automatically.
  • Custodial accounts have tax consequences: the first $1,300 of earnings per year (as of 2024) is typically tax-free for the child, and amounts above that are taxed at the child's rate, not the parent's.
  • Money in a custodial account counts as the child's asset on financial aid forms, which can reduce the amount of aid they receive compared to money held in a parent's name.

UGMA vs. UTMA: The two main types of custodial accounts

UGMA (Uniform Gifts to Minors Act) accounts are the older standard. They hold cash, stocks, bonds, and mutual funds. An adult can deposit money or transfer securities into the account, and the custodian invests and manages those assets. When the child reaches the age of majority (18 in most states, 21 in a few), the account transfers to them automatically.

UTMA (Uniform Transfers to Minors Act) accounts are newer and broader. They can hold everything UGMA accounts hold, plus real estate, artwork, patents, and other property. UTMA is now the standard in most states; some states still use UGMA, and a few allow both. The mechanics are the same: the custodian manages it until the child reaches 18 or 21.

The difference matters only if you want to transfer something other than money or securities. For a savings account or investment account, either type works. Check your state's law or ask the bank which type they offer; most will default to UTMA if available.

How money flows in and out of a custodial account

Anyone can deposit money into a custodial account—parents, grandparents, aunts, uncles, friends. There is no limit on how many people can contribute. The account belongs to the child, so all deposits are gifts to the child, not loans.

The custodian decides how to invest the money: in a savings account, money market fund, stocks, bonds, or a mix. The custodian can also withdraw money to pay for the child's expenses—school tuition, medical bills, sports equipment, a car. The rule is that the money must be spent on something that benefits the child; the custodian cannot use it for their own needs.

Once the child reaches the age of majority, the custodian must hand over the entire account. The child then owns it outright and can spend, invest, or give it away as they choose. The custodian has no say in what happens next.

Tax treatment of custodial account earnings

The child is the owner, so the account is taxed in the child's name, not the parent's. This is usually an advantage. As of 2024, the first $1,300 of investment income (interest, dividends, capital gains) per year is tax-free. The next $1,300 is taxed at the child's rate, which is typically lower than the parent's rate. Anything above $2,600 may be taxed at the parent's rate under the "kiddie tax" rule, though this rule has limits and changes based on the child's age and income.

The exact thresholds change each year with inflation. Check the IRS website or ask a tax preparer for the current year's numbers. The point is that custodial accounts can be tax-efficient for saving money for a child, especially if the child has little other income.

Deposits into the account are not taxable—only earnings (interest, dividends, gains) are. If you deposit $5,000, that $5,000 is not a taxable event for anyone.

Impact on financial aid and other considerations

Money in a custodial account counts as the child's asset when they fill out the FAFSA (Free Application for Federal Student Aid) for college. Assets in the child's name reduce financial aid more than assets in the parent's name. A parent's $10,000 in savings might reduce aid by $500; a child's $10,000 might reduce it by $2,000 or more, depending on the school's formula.

This is one reason some families choose to hold money in the parent's name instead of opening a custodial account. If college financial aid is a concern, talk to a financial advisor before depositing large sums into a custodial account.

Custodial accounts also do not offer the same legal protections as trusts. If the custodian faces a lawsuit or bankruptcy, the account could potentially be at risk, though this is rare. For very large amounts or complex family situations, a trust may be a better choice.

When the child turns 18 or 21: what happens next

On the date the child reaches the age of majority in your state, the custodian's authority ends. The account is now the child's to control. The custodian must transfer full access to the child or, if the child is not yet ready to manage it, work with the child to do so.

Some custodians worry about handing over a large sum to a teenager. The law does not give you a way around this—once the child reaches the age of majority, the account is theirs. If you want more control over when and how money is released, a trust (set up before the child is born or while they are young) is the right tool, not a custodial account.

You can talk to the child about the money, set expectations, or offer guidance, but you cannot legally restrict their use of it. Some families use this as a teaching moment; others set up a trust to delay access until the child is older.

How to open a custodial account

Most banks and brokerages offer custodial accounts. You will need the child's Social Security number, proof of identity for the custodian, and a small initial deposit (often $25 to $100). The process takes 10 to 20 minutes online or in person.

Choose a bank or brokerage based on the type of account you want: a savings account for safety, a brokerage account for stocks and funds, or a 529 plan if the money is for college (529 plans are a special type of custodial account with tax breaks for education). Ask whether they offer UGMA or UTMA, though most now default to UTMA.

Once the account is open, you can deposit money, set up automatic transfers, or invite others to contribute. The custodian can manage it online or by phone. There are no annual fees for most custodial accounts, though some brokerages charge if the balance is very small.

Frequently Asked Questions

Can I take money out of my child's custodial account for my own expenses?

No. The money belongs to the child, and the custodian can only spend it on things that benefit the child—education, medical care, living expenses, or other needs. Using it for the custodian's personal bills is a breach of the custodian's legal duty and can result in legal action by the child or other family members.

What happens if the custodian dies before the child reaches 18?

The account does not disappear. A new custodian can be named to take over, or the account can be transferred to a guardian or trustee. The details depend on your state's law and whether you named a successor custodian when you opened the account. Naming a successor when you set up the account prevents confusion and delays.

Can I move money from a custodial account to a trust?

Not directly. The money belongs to the child, so you cannot simply move it without the child's consent (once they are old enough to understand). However, you can close the custodial account and have the child (or their guardian, if they are very young) transfer the funds into a trust. This is a rare situation and usually requires legal help.

Does a custodial account affect my child's credit score?

No. A custodial account is not a loan or credit product, so it does not appear on credit reports and does not build or hurt credit. It is simply a savings or investment account in the child's name.

Can I have more than one custodian for the same account?

No. Each custodial account has one custodian. If you want multiple people to manage the money, you would need a trust or a formal partnership agreement, which is more complex. For most families, naming one trusted person as custodian and a successor is sufficient.