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What Is a Custodial Account?
Let me tell you directly: a custodial account is basically a savings account for a child or teen, set up at a bank, mutual fund company, or brokerage, and managed by an adult for the minor's benefit. As the adult, you control it until the kid hits 18 or 21, depending on your state's laws, and you need to approve all transactions like buying stocks. Think of it as any account where someone responsible handles it for another person, like a retirement plan admin for employees, but here it's for kids. Each state has rules on age and who can be the custodian.
How a Custodial Account Works
Once you set up the account, it operates just like a regular bank or brokerage account. You, as the custodian, decide how to invest the money, and others can add to it too. You can put in various assets, even crypto in some cases, but forget about margin trading or risky stuff like futures. When the minor turns adult in your state, the account transfers to them fully. If they pass away before that, it goes to their estate.
Types of Custodial Accounts
There are two main types: UTMA and UGMA. UTMA works in all states except Vermont and South Carolina, and it can hold almost anything, like real estate or art. UGMA is in all 50 states but sticks to financial stuff like stocks, bonds, and cash. You set it up in the minor's name, pick a custodian like a parent, and details like minimums vary by provider.
Advantages and Disadvantages of Custodial Accounts
These accounts have real upsides. You get tons of flexibility—no income limits for contributors, no cap on how much you put in, no forced distributions, and no penalties for pulling money out. Use the funds for anything benefiting the kid, not just school. It's cheaper and simpler than a trust. On taxes, the kid owns it, so earnings up to $1,350 in 2025 are tax-free, and more gets the child's rate—plus you can gift up to $19,000 without gift tax.
But there are downsides. The account counts as the kid's asset, so it might cut their college aid or other help. Gifts are permanent—you can't take them back. Unlike 529 plans, you lose control at majority age, and it's not as tax-sheltered. You can't change the beneficiary either.
Pros and Cons of a Custodial Account
- Pros: Easy to set up and manage, no limits on income, contributions, or withdrawals, can invest in various assets.
- Cons: Less tax advantages than 529s, hurts financial aid chances, irrevocably goes to the child at majority age.
Examples of a Custodial Account
You can find these at most brokerages. Take Merrill Edge—they let you open a UGMA/UTMA online, transfer from Bank of America accounts, with no fees or minimums. Banks offer custodial savings and checking too. Compare options like Charles Schwab (no fees, no minimum), Vanguard (some fees, $3,000 minimum for funds), Acorns (starts at $3/month), or Ally Bank (no fees, no minimum).
Retirement Security Rule and Custodial Accounts
The new DOL Retirement Security Rule, effective September 2024, pushes fiduciaries to give best advice for retirement savings, but it doesn't touch custodial accounts since the DOL doesn't oversee UGMA or UTMA.
Frequently Asked Questions
Can you withdraw from one? Yes, if it's for the minor's benefit, not just education. What happens at 18? It transfers to them, age varies by state. How to get one? An adult opens it for you if you're under age. Taxes? Kid's unearned income over $3,150 in 2025 might get taxed at 10%.
The Bottom Line
In short, a custodial account lets you save or invest for a kid, managing it until they're of age. It has tax perks but risks like aid reduction. Weigh that before starting one.
How We Picked the Best Custodial Accounts
We looked at 10 providers, checking minimum deposits, fees, history, customer service, ease of use, and education resources. We favored low fees, good learning tools, and simple platforms for you and the kid.
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