How to open a brokerage account for a child

You open a brokerage account for a child through a custodial account, which is a real investment account held in the child's name but managed by you as the parent or guardian until they reach the age of majority (usually 18 or 21, depending on your state). The account lets your child own stocks, bonds, mutual funds, and other investments while you control the decisions until they're old enough to take over.

The process itself is straightforward: you choose a brokerage firm, complete their account process, provide your child's Social Security number, fund the account, and start investing. The main decision you'll make upfront is whether to use a Uniform Gifts to Minors Act (UGMA) account or a Uniform Transfers to Minors Act (UTMA) account — both are custodial structures, and most brokerages offer one or both.

Key Takeaways

  • A custodial account is opened in your child's name with you as custodian, and you control all investment decisions until they reach the age of majority in your state.
  • Most major brokerages (Fidelity, Schwab, Vanguard, E-Trade) offer custodial accounts with no minimum deposit, though some have account minimums for certain investment types.
  • You will need your child's Social Security number, your own identification, and proof of address to open the account.
  • Money in a custodial account belongs to your child and counts against their financial aid may be able to access, so understand the tax and aid implications before funding it.
  • When your child reaches the age of majority, the account automatically transfers to their control — you cannot prevent this or extend your custodianship.

UGMA vs. UTMA: Which account type to choose

Both UGMA and UTMA accounts are custodial structures, but they differ in what assets they can hold and when the account transfers to your child. A UGMA account is limited to cash, stocks, bonds, and mutual funds. A UTMA account can also hold real estate, artwork, patents, and other property. For most families investing in stocks or funds, the difference doesn't matter — UGMA is simpler and more widely available.

The more important difference is the age of transfer. In most states, a UGMA account transfers to your child at 18, while a UTMA account can transfer at 21 if you choose that option when you open it. Check your state's rules, because they vary. If you want your child to have access to the money later rather than earlier, UTMA with a 21 transfer age gives you a few more years, though you still lose control at that point.

Once the account transfers, it is your child's to use as they wish — you have no say in how they spend it. This is a legal requirement, not a choice. Plan accordingly if you're funding the account for a specific goal like college.

What you need to open the account

Gather these documents before you start: your child's Social Security number, your own government-issued ID (driver's license or passport), proof of your current address (a recent utility bill or bank statement), and your child's date of birth. Some brokerages also ask for your employment information and the source of funds you're depositing.

You do not need your child present to open the account. You are the account owner and custodian, so the process is in your name. Your child's Social Security number is required because the account is held in their name for tax purposes, but they don't sign anything or need to be involved in the process.

If you're opening the account online, the process usually takes 10 to 15 minutes. Some brokerages still offer phone or in-person applications if you prefer to speak with someone. The account is typically active within one to three business days.

Choosing a brokerage and funding the account

Major brokerages that offer custodial accounts include Fidelity, Charles Schwab, Vanguard, E-Trade, and Merrill Edge. All of them have zero account minimums for custodial accounts, though some have minimums for specific investments (for example, some mutual funds require a $1,000 minimum purchase). Compare their investment options, fees, and user interface to see which fits your needs.

Once your account is open, you fund it by transferring money from your bank account. You can deposit as much or as little as you want — there's no annual limit on how much you can put in. However, there is a gift tax limit: you can give up to $18,000 per year per child (as of 2024, though this amount changes annually) without filing a gift tax return. If you give more than that in a single year, you'll need to file Form 709 with the IRS. Check the current year's limit before making a large deposit.

After the money is in the account, you decide what to invest it in. You might buy individual stocks, mutual funds, exchange-traded funds (ETFs), or bonds — the same investments available in a regular brokerage account. Your child doesn't make these decisions; you do, as the custodian.

Understanding taxes and financial aid impact

Money in a custodial account belongs to your child for tax purposes, which means investment income (dividends, capital gains, interest) is taxed in your child's name, not yours. This can be an advantage if your child has little or no other income, because the first portion of investment income is taxed at their lower rate or not taxed at all. For 2024, the first $1,300 of unearned income is tax-free for a dependent child (this amount changes yearly).

However, a custodial account counts as your child's asset on the Free process for Federal Student Aid (FAFSA). Assets in your child's name reduce their financial aid may be able to access more sharply than assets in your name — the formula expects your child to contribute a larger percentage of their assets toward college costs. If your child will be explore for financial aid, a large custodial account can reduce the aid they receive. Some families choose to fund custodial accounts only after their child has completed their final FAFSA, or they keep the balance modest.

Talk to a tax professional or financial advisor if you're planning to fund a large account or if your child has other income. The tax and aid rules are specific to your situation.

What happens when your child reaches the age of majority

When your child turns 18 (or 21, depending on the account type and your state), the custodial account automatically converts to a regular account in their name. You lose all control and decision-making authority. Your child can then buy, sell, or withdraw money as they wish, with no input from you.

This transfer is automatic — you don't have to do anything, and you cannot prevent it or extend your custodianship. Some parents worry about this, especially if they've funded a large account. The reality is that once money is in a custodial account, it legally belongs to your child, and the law requires the transfer to happen. If you want to maintain control over money longer, a custodial account is not the right tool. You might instead consider a 529 college savings plan (which you control even after your child turns 18) or straightforward keeping money in your own name and gifting it to your child later.

Common reasons parents open custodial accounts

Some parents use custodial accounts to teach their child about investing and money management by letting them watch the account grow and eventually take it over. Others use them to set aside money for a specific goal, like a car or college, though they understand the money will be the child's to use as they choose once they reach the age of majority. Some grandparents or relatives open custodial accounts as a way to gift money to a child while keeping it separate from the parents' finances.

A custodial account is not the right choice if you want to set aside money for your child but keep control of it indefinitely, or if you want to restrict how they use it after they turn 18. In those cases, a trust (which requires a lawyer to set up) or a 529 plan (which has restrictions on how the money can be used) might be better options.

Frequently Asked Questions

Can I open a custodial account if my child doesn't have a Social Security number yet?

You can open the account, but you won't be able to fund it or invest until you have the Social Security number. If your child was born recently, you can explore for a number through the Social Security Administration or often through your hospital at birth. Once you have it, you can complete the funding step.

What if I want to move the account to a different brokerage later?

You can transfer a custodial account from one brokerage to another through a process called an ACAT transfer (Automated Customer Account Transfer). The new brokerage handles most of the paperwork. The transfer usually takes one to two weeks and doesn't trigger any taxes or fees.

Can my child contribute their own money to the account?

Yes. If your child earns money from a job or other source, they can deposit it into their custodial account. You still control the investment decisions, but the money in the account is a mix of what you contributed and what they contributed.

Do I have to tell my child about the account?

That's your choice. Some parents open custodial accounts as a surprise gift and tell their child when they turn 18. Others involve their child from the start as a teaching tool. There's no legal requirement to disclose it, but keeping it secret means your child won't learn from watching it grow.

What happens if I die before my child reaches the age of majority?

The account passes to your estate and is handled according to your will or your state's inheritance laws. If you name a successor custodian in your brokerage account documents, that person can take over managing the account for your child. It's worth asking your brokerage about this option when you open the account.