Yes, you can open an investment account for a child, but the account belongs to the child, not you

You can open an investment account in a child's name through most brokerages and investment firms. The account is legally owned by the child, even though you manage it until they reach adulthood. The most common way is a custodial account, which lets a parent or guardian buy stocks, bonds, mutual funds, or other investments on the child's behalf.

The key difference from a regular savings account is that the money is invested — meaning it buys pieces of companies or bonds rather than sitting in a bank earning interest. This means the account can grow faster, but it can also lose value if investments go down. You control the decisions while the child is young, but the account transfers to the child's full control at a set age, usually 18 or 21 depending on your state and the account type.

Key Takeaways

  • A custodial account lets you invest money for a child in their name, with you making investment decisions until they turn 18 or 21.
  • The two main types are UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts, which vary slightly by state.
  • You will need the child's Social Security number, proof of your identity, and proof of your relationship to the child to open the account.
  • Money in the account belongs to the child for tax purposes, which can lower the tax bill if the child has little or no income.
  • Once the child reaches the age of majority in your state, the account becomes theirs to control, and you lose decision-making power.

UGMA and UTMA accounts: the two main types

Most custodial accounts fall into one of two categories: UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act). Both let you invest money for a child, but UTMA is slightly broader. UGMA accounts can hold stocks, bonds, mutual funds, and cash. UTMA accounts can hold those things plus real estate, artwork, and other property. Not every state offers both — check with your brokerage or your state's laws to see which one you can use.

The main practical difference is that UTMA accounts can stay under your control a bit longer in some states. With UGMA, the account transfers to the child at 18 or 21 depending on your state. With UTMA, you can sometimes delay the transfer until 25, though this varies by state. Once the account transfers, it is the child's money to spend or invest as they wish — you have no say in what happens to it.

Both types are offered by most major brokerages, including Fidelity, Vanguard, Charles Schwab, and E*TRADE. You can also open one through a bank, though banks typically offer fewer investment choices than brokerages.

What you need to open the account

To open a custodial account, you will need the child's Social Security number, your own ID (driver's license or passport), and proof that you are the parent or legal guardian. Some brokerages also ask for the child's date of birth and address. The process usually takes 10 to 15 minutes online, though some firms still require you to print and mail forms.

You will also need to decide how much to deposit to start. Most brokerages have no minimum, though some require $500 or $1,000 to open. After the account is open, you can add money whenever you want — there is no limit on how much you can contribute per year for investment purposes, though there are separate tax rules if you want to use the account to pay for education (see the 529 plan section below).

Once the account is open, you choose what to invest in. You can buy individual stocks, mutual funds, exchange-traded funds (ETFs), or bonds. If you are not sure where to start, many brokerages offer target-date funds or balanced funds designed for long-term growth, which automatically adjust as the child gets older.

How taxes work with a custodial account

Money in a custodial account is taxed in the child's name, not yours. This can be a big advantage if the child has little or no income. The first portion of investment earnings — currently around $1,300 per year — is tax-free. The next portion is taxed at the child's rate, which is usually lower than yours. Only earnings above that are taxed at your rate.

This means if you invest $10,000 for a child and it earns $500 in dividends, that $500 is taxed in the child's name at their rate, not your rate. Over time, this can save you money. However, if the account grows very large, some of the earnings may be taxed at your rate under what is called the "kiddie tax" rule. This is a detail your accountant can explain based on your specific situation.

You will receive a tax form each year showing the earnings in the account. You report this on the child's tax return if they file one, or on your return if they do not. Keep records of what you put in and when, because only the earnings are taxable — the money you contributed is not.

529 plans: a different option for education

If your main goal is to save for college or private school, a 529 plan may be better than a custodial account. A 529 is a tax-advantaged savings plan specifically for education. Money grows tax-free, and you can withdraw it tax-free to pay for tuition, room and board, books, and other school costs.

The tradeoff is that 529 plans are less flexible. If you withdraw money for something other than education, you pay taxes on the earnings plus a 10% penalty. A custodial account has no such restriction — the child can use the money for anything once they turn 18 or 21. If you are certain the money will go to school, a 529 is usually the better choice. If you want flexibility, a custodial account is better.

You can have both: a 529 for education savings and a custodial account for other goals. Many families do this to maximize tax advantages while keeping options open.

What happens when the child turns 18 or 21

The account automatically transfers to the child's control at the age set by your state and account type — usually 18 for UGMA, 18 or 21 for UTMA depending on the state. Once the transfer happens, you lose all decision-making power. The child can withdraw the money, change the investments, or spend it however they want. You cannot stop them.

This is why it matters what you invest in. If you put the money in very risky stocks, the child might lose it all. If you put it in stable funds, they have a safer foundation. Many parents use this as a teaching moment — they explain the account to the child before the transfer and discuss what the money is meant for.

Some brokerages will let you request a delay in the transfer if the child is not ready to manage money, but this varies by firm and state. It is worth asking your brokerage about their policy before the child reaches the age of majority.

Custodial accounts versus other ways to save for a child

A custodial account is not the only way to save for a child. Here are the main alternatives and when each makes sense:

  • A regular savings account in the child's name: Safer and simpler, but earns very little. Good if you want no investment risk.
  • A 529 plan: Tax-free growth for education only. Better if college is the goal.
  • A Roth IRA in the child's name: Only works if the child has earned income from a job. Offers tax-free growth and withdrawal rules designed for retirement, but can also be used for education or other goals.
  • Money in your own name: You keep full control, but the child gets no tax advantage and the money counts against them if they explore for financial aid.

Each option has trade-offs. A custodial account is the most flexible if you want investment growth with the child's tax advantage and no restrictions on how the money is used.

Frequently Asked Questions

Can I change my mind and take the money back after I put it in?

No. Once money is in a custodial account, it legally belongs to the child. You cannot withdraw it for yourself. You can only use it for the child's benefit — things like education, medical care, or living expenses. If you need the money for yourself, you should not put it in a custodial account.

Does a custodial account hurt the child's chances of getting financial aid?

Yes, it can. Money in a custodial account counts as the child's asset when they explore for college financial aid, which can reduce the amount of aid they receive. A 529 plan is treated more favorably under financial aid rules. If financial aid is a concern, talk to a financial advisor about which account type works best for your situation.

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

Yes, but you must be the legal guardian or have the parent's permission. Some brokerages require you to be the parent or legal guardian, while others allow any adult to open an account if they have guardianship. Call your brokerage to ask what they allow.

What if the child never uses the money?

It stays in the account. Once the child reaches the age of majority, it becomes their property. If they do not touch it, it can keep growing. If they pass away before reaching adulthood, the account becomes part of their estate and goes to whoever they named as beneficiary, or to their parents if no beneficiary was named.

Can I invest in individual stocks, or do I have to use mutual funds?

Most brokerages let you do either. You can buy individual stocks, ETFs, mutual funds, or bonds — whatever you choose. Some brokerages have minimum investment amounts for individual stocks, so check before you open the account if you have a specific stock in mind.