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

The adult — usually a parent, grandparent, or guardian — is the custodian. They manage the money, make deposits and withdrawals, and decide how it is spent. The child owns the account and the money in it, but cannot access or control it until they turn 18 or 21, depending on your state and the type of account.

Custodial accounts are commonly used to save for a child's education, set aside money from gifts or inheritance, or teach financial responsibility. The account is held at a bank, credit union, or brokerage firm, and the money belongs to the child from day one — it is not the custodian's personal money.

Key Takeaways

  • The custodian controls the account during the child's minority but the child is the legal owner and the money is not the custodian's property.
  • Two main types exist: UTMA accounts (Uniform Transfers to Minors Act) and UGMA accounts (Uniform Gifts to Minors Act), with UTMA being more common and allowing more types of assets.
  • When the child reaches the age of majority — usually 18 or 21 depending on state and account type — control transfers automatically to them with no court involvement.
  • Custodial accounts have tax consequences: the first roughly $1,400 of earnings per year is tax-free for the child, the next $1,400 is taxed at the child's rate, and earnings above that are taxed at the parent's rate (rules vary by year).
  • Once control transfers to the child, the custodian has no say in how the money is used, even if the child spends it on something the custodian disagrees with.

UTMA and UGMA accounts: the two main types

Most custodial accounts are opened under either the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). These are state laws that set the rules for how custodial accounts work. UTMA is newer and is used in most states; UGMA is older and still available in some states alongside UTMA.

The main difference is what can go into the account. UGMA accounts hold only cash, securities (stocks and bonds), and insurance policies. UTMA accounts can hold those things plus real estate, artwork, patents, and other property. If you are opening an account to hold only money or stocks, either type works. If you might transfer real estate or other assets later, UTMA is the better choice.

Both types work the same way: the custodian controls the account, the child owns it, and control passes to the child at the age set by your state law — usually 18 for UGMA and 18 or 21 for UTMA, depending on the state.

How the custodian's role works during the account's life

As custodian, you can deposit money, withdraw money, and spend it on the child's behalf. You can use the account to pay for the child's education, medical care, food, housing, or other needs. You can also invest the money in stocks, bonds, or mutual funds if the account is held at a brokerage.

You cannot use the money for your own expenses or treat it as your own account. The money belongs to the child, and you are managing it in their interest. If you withdraw money and spend it on yourself, you are taking the child's property, and the child can pursue legal action against you after they reach the age of majority.

You do not need court permission to make withdrawals or investments. You straightforward manage the account as you see fit, though you should keep records of what you spend and why, in case the child questions your decisions later.

What happens when the child turns 18 or 21

When the child reaches the age of majority set by your state law, control of the account transfers to them automatically. There is no court process, no paperwork to file, and no custodian approval needed. The child becomes the sole owner and can withdraw the money, close the account, or keep it open and manage it themselves.

This transfer is permanent and irreversible. Once the child has control, you have no legal say in how they use the money. They can spend it on education, invest it, give it away, or spend it on something you strongly disagree with. Many parents find this difficult, but it is the law: the account belongs to the child, and at the age of majority, it is theirs to control.

Some parents try to delay this transfer by opening accounts in their own name instead, but that defeats the purpose of a custodial account and creates tax and legal problems if the parent dies or faces creditors.

Tax treatment of custodial accounts

Custodial accounts have special tax rules. The first roughly $1,400 of earnings (interest, dividends, capital gains) per year is tax-free for the child. The next $1,400 is taxed at the child's tax rate, which is usually lower than the parent's. Earnings above that are taxed at the parent's rate — a rule called the kiddie tax.

These dollar amounts change each year with inflation, so check the current year's limits with the IRS or a tax professional. The point is that some earnings are sheltered from tax, some are taxed at the child's lower rate, and high earnings are taxed at the parent's rate to prevent parents from shifting income to children to avoid taxes.

You will receive a 1099 form each year if the account earns more than a small amount, and you must report the earnings on the child's tax return. This is true even if the child is very young.

Custodial accounts and financial aid

Custodial accounts can affect how much financial aid a child receives for college. The account is counted as the child's asset when calculating Expected Family Contribution (EFC) or Student Aid Index (SAI) — the amount the family is expected to pay toward college costs.

Assets in the child's name are counted more heavily than parental assets. A custodial account with $10,000 will reduce financial aid more than a parent's savings account with $10,000. If you are planning to save for college and expect the child to receive financial aid, talk to a financial planner or the college's financial aid office about whether a custodial account is the best choice. A 529 plan or Coverdell ESA may have better treatment under financial aid rules.

Custodial accounts versus trusts

Custodial accounts and trusts both hold money for a child, but they work differently. A custodial account is simpler and cheaper to set up — you open it at a bank or brokerage with a form. A trust requires a lawyer to draft and is more expensive.

With a custodial account, control passes to the child automatically at the age of majority. With a trust, you can set conditions: the child might not receive the money until age 25, or until they graduate college, or in installments over time. You can also name a successor trustee to manage the money if you die, whereas a custodial account has no built-in succession plan.

For most families saving modest amounts for a child, a custodial account is simpler and sufficient. For larger amounts or more complex wishes about how the money is used, a trust may be worth the cost.

Frequently Asked Questions

Can I change my mind and take the money back once the child reaches the age of majority?

No. Once the child reaches the age of majority, the account is theirs, and you have no legal claim to it. The money was always theirs — you were just managing it. If you want to keep control of money longer, you need a trust, not a custodial account.

What happens to a custodial account if the custodian dies?

The account does not automatically pass to a new custodian. The account is still the child's property, but there is no adult managing it. If the child is still a minor, a court may need to appoint a guardian or conservator. To avoid this, name a successor custodian when you open the account, or set up a trust with a named trustee instead.

Can I use the custodial account to pay for things the child needs, like food or school?

Yes. You can withdraw money to pay for the child's food, housing, education, medical care, and other needs. This is considered a proper use of custodial funds. However, you should not use it to pay for things you would normally pay for anyway as a parent — the line is blurry, so keep records of what you spend and why.

Does the child know about the custodial account?

That is up to you. Some parents tell the child about the account to teach them about saving and money management. Others keep it private until the child is older. There is no legal requirement to tell the child, but transparency often leads to better outcomes when the child takes control.

Can I open a custodial account for a grandchild or other relative?

Yes. You do not have to be the parent to be the custodian. Grandparents, aunts, uncles, and other adults can open custodial accounts. The rules are the same: you manage the account, the child owns it, and control passes to them at the age of majority.