A custodial brokerage account is an investment account opened in a minor's name, with an adult (the custodian) managing the money until the child reaches the age of majority.
The custodian—usually a parent, grandparent, or other trusted adult—buys and sells stocks, bonds, mutual funds, and other investments on behalf of the minor. The account belongs to the child legally, but the custodian has full control over all transactions until a set date, typically age 18 or 21 depending on your state and the account type.
Money in the account grows tax-deferred in some cases, though the child pays taxes on earnings above a certain threshold each year. When the child reaches the age of majority, control transfers to them automatically—the custodian's role ends, and the young adult can do whatever they want with the balance.
Key Takeaways
- A custodian manages all buying, selling, and withdrawals until the minor reaches age 18 or 21, depending on whether the account is UGMA or UTMA and your state's rules.
- The account is irrevocable—once money is deposited in the child's name, it cannot be taken back or redirected to another person, even if circumstances change.
- Earnings above $1,300 per year (as of 2024) are taxed at the child's rate, which is usually lower than the parent's rate, but the exact threshold changes annually.
- When the child reaches majority, they gain full control and can withdraw the entire balance for any reason, including uses the custodian may not have intended.
UGMA and UTMA: The two account types and how they differ
Most custodial accounts are opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Both are state laws that set the legal framework for how the account works.
UGMA accounts can hold cash, stocks, bonds, and mutual funds. UTMA accounts can hold those same assets plus real estate, artwork, and other property. In practice, most people use UGMA for straightforward stock and fund investing because it is simpler and widely supported by brokers.
The age of majority—when control passes to the child—is 18 in most states under UGMA and 21 under UTMA, though some states allow custodians to delay transfer until age 25. Check your state's law or ask your broker which ages apply in your jurisdiction.
How money moves in and out of the account
Only the custodian can deposit money into a custodial account. Gifts from parents, grandparents, relatives, or anyone else go through the custodian, who then deposits them. There is an annual gift tax limit—$18,000 per person per year as of 2024—but gifts to custodial accounts for minors are usually exempt from gift tax reporting if they stay under that threshold.
The custodian controls all withdrawals. Money can be taken out for the child's benefit—education, medical care, living expenses—but the custodian decides what counts as a legitimate use. Some custodians withdraw money to pay for college tuition or a car; others leave it untouched until the child turns 18.
Once the child reaches majority, they own the account outright. They can withdraw everything, leave it invested, or do anything else they choose. The custodian has no say and no legal claim to the money.
Tax treatment and how earnings are reported
The child is the account owner for tax purposes, so earnings (dividends, capital gains, interest) are reported on the child's tax return, not the parent's. This is often a tax advantage because children typically have lower tax rates than their parents.
The first $1,300 of unearned income per year (as of 2024) is tax-free for a dependent child. Income between $1,300 and $13,000 is taxed at the child's rate. Income above $13,000 may be taxed at the parent's rate under the "kiddie tax" rule, which applies to children under age 24 in most cases.
The custodian or the child's parent must file a tax return for the child if earnings exceed the filing threshold. A Form 8615 is used to report kiddie tax. These thresholds change each year, so check the IRS website or a tax professional for the current year's numbers.
The irrevocable nature of custodial accounts
Once money is deposited into a custodial account, it cannot be withdrawn by the donor or redirected to another person. The gift is permanent and legally belongs to the child. This is true even if the donor's circumstances change—job loss, medical emergency, or a change of mind.
Some people misunderstand this and assume they can treat a custodial account like a savings account they can tap into later. They cannot. If you think you might need the money back, a custodial account is not the right tool. A regular savings account, a 529 education savings plan (which has more flexibility), or a trust with different terms would be better choices.
What happens when the child reaches majority
On the date set by your state's law (usually 18 or 21), the custodian's authority ends automatically. The account is transferred into the child's sole name, and they have complete control. They can withdraw the entire balance, leave it invested, spend it on college, use it for a down payment on a house, or spend it on anything else.
The custodian cannot prevent this transfer or impose conditions. If you want to restrict how money is used after the child turns 18, a custodial account will not do that. A trust with specific terms, set up by an attorney, would be necessary.
Some young adults are surprised by the size of the account and make poor decisions. Others use it exactly as intended. The custodian has no legal recourse once control passes to the child.
Custodial accounts versus other ways to save for a child
A 529 plan is designed specifically for education expenses and offers tax advantages if money is used for tuition, room and board, or student loan repayment. Unused money can be rolled to another family member. A custodial account has no such restrictions or protections.
A trust set up by a will or a separate document can specify exactly how and when money is used, and can delay the child's control until age 25, 30, or later. A custodial account transfers control automatically at 18 or 21.
A regular savings account in the parent's name keeps the money under the parent's control indefinitely, but it does not offer the tax advantages of a custodial account and may affect the child's financial aid if the child later applies for college.
Frequently Asked Questions
Can I change my mind and take the money back after I deposit it?
No. A custodial account is irrevocable, meaning the gift is permanent once deposited. The money legally belongs to the child, and you cannot withdraw it or redirect it to someone else, even if your situation changes. If you think you might need the money later, do not open a custodial account.
Will 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 the child's asset on the Free Application for Federal Student Aid (FAFSA), and a higher percentage of the child's assets are expected to go toward college costs compared to parent assets. This can reduce the amount of need-based aid the child receives. A 529 plan has more favorable treatment under FAFSA rules.
What if my child turns 18 and immediately withdraws all the money?
They can do that. Once they reach majority, they own the account and can withdraw everything. You have no legal control or say in how they use it. If you want to prevent this, you would need to set up a trust with specific conditions instead of a custodial account.
Do I have to file taxes on the money I deposit into the account?
No. Deposits are gifts and are not taxable income to you or the child. Only earnings (dividends, capital gains, interest) are taxed, and those are reported on the child's tax return, not yours.
Can I name someone else as custodian if I die?
You can name a successor custodian when you open the account, and that person will take over if you die or become unable to manage it. However, they still must transfer the account to the child at the age of majority set by your state's law. The successor custodian cannot extend their control beyond that date.