A custodial account is a bank or investment account opened in a minor's name but controlled by an adult until the child reaches the age of majority

The adult — usually a parent, grandparent, or guardian — manages the money, makes all decisions about how it is invested or spent, and files tax returns on the account. The minor owns the money legally, but cannot touch it or direct how it is used until they turn 18 or 21, depending on your state and the type of account. The account exists to let you save or invest on behalf of a child while keeping the money separate and protected.

Custodial accounts come in two main forms: UGMA accounts (Uniform Gifts to Minors Act) and UTMA accounts (Uniform Transfers to Minors Act). UTMA accounts are newer and more flexible — they can hold real estate, artwork, and other property in addition to cash and securities. UGMA accounts hold only cash and securities. Both work the same way: you deposit money, the custodian manages it, and the child receives it when they come of age.

Key Takeaways

  • A custodial account is owned by the minor but controlled by an adult custodian until the child reaches 18 or 21, depending on state law and account type.
  • You can open a custodial account at most banks and brokerages with just the child's Social Security number, a form of ID for the custodian, and an initial deposit.
  • Money in a custodial account belongs to the child for tax purposes, so earnings above a certain threshold are taxed at the child's rate rather than yours.
  • When the child reaches the age of majority, the account automatically transfers to their control — you cannot keep it or redirect the money.
  • Custodial accounts do not affect your taxes directly, but they may reduce financial aid may be able to access because the money is considered the child's asset.

How a custodial account works in practice

You open the account by providing the child's name, Social Security number, and date of birth, along with your own identification. The financial institution issues the account in both names — for example, "John Smith, custodian for Sarah Smith, a minor." You receive the debit card or checkbook, and you make all deposits, withdrawals, and investment decisions. The child's name is on the account, but they have no access to it.

As the custodian, you can spend the money on the child's benefit — education, medical care, housing, food — without restriction. You can also let it sit and grow. The account earns interest or investment returns, which accumulate in the child's name. When the child turns 18 or 21 (depending on your state and whether it is UGMA or UTMA), the account automatically becomes theirs. At that point, you lose all control, and they can withdraw or spend the money however they choose.

Tax treatment of custodial accounts

The money in a custodial account belongs to the child for tax purposes from day one. This means earnings — interest, dividends, capital gains — are taxed at the child's rate, not yours. For 2024, the first $1,450 of unearned income (interest, dividends) is tax-free for a dependent child. The next $1,450 is taxed at the child's rate, which is usually lower than yours. Anything above that may be taxed at your rate under the "kiddie tax" rule, which applies to children under 18 (or 24 if they are a full-time student).

You file a tax return for the account each year if earnings exceed the filing threshold. The child's Social Security number goes on the return, not yours. This is one reason custodial accounts can be useful for saving — the tax burden stays lower than it would if you held the money in your own name. However, the account does reduce the child's financial aid may be able to access because colleges count student-owned assets more heavily than parent-owned assets when calculating need.

Custodial accounts versus 529 plans and other savings vehicles

A 529 college savings plan is different from a custodial account. In a 529, you remain the owner and keep control of the money even after the child turns 18. You decide when and how much to withdraw for education expenses. If the child does not go to college, you can change the beneficiary to another family member or withdraw the money (though you will owe taxes and a penalty on the earnings). A custodial account gives up all control at age 18 or 21.

A 529 also has better financial aid treatment — it counts as a parent asset rather than a student asset, so it reduces aid may be able to access less than a custodial account does. However, a custodial account is more flexible because the money can be used for anything, not just education. If you want to save for a child's future without restrictions, a custodial account works. If you are specifically saving for college and want to keep control, a 529 is usually the better choice.

A trust account is another option. Trusts give you more control over when and how the child receives the money — you can set conditions, delay distribution past age 18, or name a successor trustee. Trusts cost more to set up and maintain, so they are usually chosen when larger sums are involved or when you want detailed instructions about how the money should be used.

Opening a custodial account at a bank or brokerage

Most banks and brokerages offer custodial accounts. You can open one online or in person. You will need the child's Social Security number, your own ID, and an initial deposit (usually $25 to $100, depending on the institution). Some brokerages require higher minimums if you plan to invest in mutual funds or stocks.

When you open the account, you will choose whether it is UGMA or UTMA — most institutions default to UTMA because it is more flexible. You will also designate yourself as the custodian. Some institutions let you name a successor custodian, who takes over if you die or become unable to manage the account. This is worth doing if you have a large balance or want to ensure the account stays open and accessible.

After the account is open, you can deposit money by check, transfer, or direct deposit. You manage the account online or by phone, just as you would your own account. The child receives statements in the mail or online, but they cannot log in or make changes. When the child turns 18 or 21, the institution will notify you, and the account will transfer to their control automatically — you do not need to do anything, but you also cannot prevent it.

What happens when the child reaches the age of majority

The age at which a custodial account transfers to the child's control varies by state. Most states use 18 for UGMA accounts and 21 for UTMA accounts, but some states allow you to choose. Check your state's law before opening the account if the timing matters to you. Once the child reaches that age, the account is theirs. You have no say in how they spend it, and you cannot take the money back.

This is a significant difference from a trust, where you can set conditions and timelines. If you want the child to have access to the money only at a certain age or for a specific purpose, a custodial account is not the right tool. However, if you trust the child to make reasonable decisions once they turn 18 or 21, a custodial account is simpler and cheaper to maintain.

Custodial accounts and financial aid

Money in a custodial account counts as the student's asset when calculating financial aid. The federal aid formula expects students to contribute a larger percentage of their assets toward education than parents do. This means a custodial account with $10,000 in it will reduce financial aid may be able to access more than a parent-owned savings account with the same balance.

If you are saving for college and want to minimize the impact on financial aid, a 529 plan or a Coverdell Education Savings Account (ESA) is usually better because they are treated more favorably. However, if you are saving for something other than college, or if financial aid is not a concern, a custodial account works fine. The trade-off is flexibility and control versus aid may be able to access.

Frequently Asked Questions

Can I take money out of a custodial account for my own expenses?

No. The money belongs to the child, and you can only spend it on their benefit — education, medical care, food, housing, and similar expenses. Using custodial account money for your own bills or personal expenses is illegal and can result in tax penalties or legal action. If you need to save money for yourself, open a separate account in your own name.

What happens if the custodian dies?

If you named a successor custodian when you opened the account, they take over automatically. If you did not, the account may be frozen until the child turns 18 or 21, or a court may appoint a new custodian. This is why naming a successor is important, especially if the account has a large balance. Check with your bank or brokerage about their specific process.

Can I change my mind and close a custodial account?

You cannot close the account and keep the money — it belongs to the child. However, you can withdraw money for the child's benefit and use it for their expenses. Once the child turns 18 or 21, the account is theirs, and you have no authority over it. If you want more control, consider a trust instead of a custodial account.

Do I need to file a separate tax return for the custodial account?

Only if the account earns more than the filing threshold for that year. For 2024, a dependent child with unearned income over $1,450 must file a return. Your tax preparer or the financial institution can tell you whether a return is needed based on the account's earnings. The return goes under the child's Social Security number, not yours.

Can I open a custodial account for a grandchild or niece?

Yes. You do not have to be the parent to be the custodian. Grandparents, aunts, uncles, and other relatives can open and manage custodial accounts. The rules are the same — you control the account until the child reaches 18 or 21, and then it becomes theirs. Make sure you understand your state's age of majority rules before opening the account.