A custodial account lets you manage money for a minor until they reach adulthood

A custodial account is a savings or investment account held in a minor's name but controlled by an adult—usually a parent or guardian—until the child turns 18 or 21, depending on your state and the account type. The money belongs to the child legally, but you make all the decisions about deposits, withdrawals, and investments until they reach the age of majority.

There are two main legal structures: a Uniform Transfers to Minors Act (UTMA) account and a Uniform Gifts to Minors Act (UGMA) account. UTMA accounts are newer and available in all 50 states; they can hold real estate, artwork, and other property in addition to cash and securities. UGMA accounts, the older standard, exist in most states and are limited to cash and securities. Both work the same way operationally—you open it, fund it, manage it, and the account transfers to the child when they come of age.

Key Takeaways

  • You need the minor's Social Security number, proof of identity for both the child and yourself, and the child's address to open a custodial account.
  • UTMA accounts are available in all states and can hold property; UGMA accounts are older and limited to cash and securities, but both serve the same purpose.
  • Banks, brokerages, and investment firms all offer custodial accounts, and the process takes 10 to 20 minutes online or in person.
  • Once the child reaches the age of majority (18 or 21, depending on your state), the account automatically transfers to them and you lose control.
  • Custodial accounts count as the child's asset for financial aid purposes, which can reduce the amount of aid they receive in college.

What you need to open the account

Gather the minor's Social Security number and a form of ID—a birth certificate, passport, or state ID card. You will also need your own ID and proof of address (a utility bill or bank statement dated within the last 60 days works). Some institutions ask for the child's address; if the child lives with you, your address is fine.

Have the child's name spelled exactly as it appears on their birth certificate or ID. The account will be titled something like "John Smith, as custodian for Sarah Smith, a minor" or "Sarah Smith UTMA FBO John Smith"—the exact format depends on the institution and your state law.

If you are opening the account at a bank, bring these documents in person or upload them online. If you are opening it at a brokerage or investment firm, the process is entirely online; you will answer questions about the account type, the child's information, and your relationship to the child, then upload documents through their portal.

Choosing between a bank, brokerage, or investment firm

Banks offer custodial savings accounts and money market accounts—low-risk options that earn interest. Brokerages like Fidelity, Charles Schwab, and Vanguard offer custodial investment accounts where you can buy stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Investment firms and robo-advisors like Betterment and Wealthfront also offer custodial accounts with automated portfolio management.

If you want the money to sit safely and earn a small return, a bank custodial savings account is straightforward and FDIC-insured up to $250,000. If you plan to invest for long-term growth—say, for college in 10 years—a brokerage custodial account gives you more options and typically lower fees. Compare the minimum deposit (some require $0, others $500 or more), annual fees, and investment options before you choose.

Many parents open a custodial account at the same institution where they already bank or invest, straightforward for convenience. There is no requirement to use a particular type of firm, so pick based on where you are comfortable managing the account.

The step-by-step process

Start by visiting the institution's website or calling their customer service line and asking for the custodial account process. Most banks and brokerages have a dedicated online form; some still require a paper process you can mail in, though this is less common.

Fill in the child's full name, date of birth, and Social Security number. Enter your name, relationship to the child (parent, grandparent, legal guardian), and your contact information. Select UTMA or UGMA as the account type—if you are unsure, UTMA is the default in most states and is more flexible. Choose the account subtype: savings, money market, or investment, depending on what you plan to do with the money.

Upload or provide copies of the required documents. The institution will verify the information, which usually takes one to three business days. Once approved, you will receive confirmation and login credentials. You can then deposit money and begin managing the account.

How deposits and withdrawals work

You can deposit money into a custodial account the same way you would into any other account: by check, bank transfer, or automatic recurring deposit. There is no legal limit on how much you can deposit each year, though the IRS has rules about gift taxes if you are funding the account from someone other than the child's parents.

Withdrawals must be for the child's benefit—education, medical care, living expenses, or other needs. You cannot withdraw money to pay your own bills or use it for yourself. In practice, most institutions do not police this; they will process any withdrawal you request. But legally, if you misuse the money, the child can take action against you after they reach adulthood.

Once the child turns 18 or 21 (depending on your state), the account is theirs. You lose the right to withdraw or control it. Some institutions require the young adult to sign a form acknowledging the transfer; others do it automatically. Check your state law and your institution's policy to know exactly when control passes.

Tax implications and financial aid impact

The child pays taxes on any earnings in the account—interest, dividends, or capital gains. The first $1,250 of earnings per year (as of 2024) is tax-free; earnings above that are taxed at the child's rate, which is usually lower than yours. The principal—the money you deposited—is never taxed because it is a gift.

Custodial accounts count as the child's asset when they explore for federal student aid. The Free process for Federal Student Aid (FAFSA) treats student-owned assets more harshly than parent-owned assets: roughly 20 percent of the student's assets reduce aid may be able to access, compared to 5.64 percent of parent assets. If you have a large custodial account and plan to pay for college with federal aid, this can reduce the amount the child receives. Some families open custodial accounts in the grandparent's name or use a 529 college savings plan instead to avoid this penalty.

What happens when the child turns 18 or 21

The account automatically becomes the child's property on their birthday. In most states, this happens at 18 for UGMA accounts and 21 for UTMA accounts, though some states allow you to choose the age when you open the account. Once the transfer occurs, you have no legal right to the money, and the child can withdraw it all and spend it however they want.

Some institutions send a notice before the transfer date; others do not. Mark the date on your calendar and contact the institution a few months beforehand to understand the exact process. If you want to discuss the account with your child before they take control, do that well in advance—there is no legal way to prevent the transfer or delay it.

Frequently Asked Questions

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

Yes. You must be a legal guardian or have the parent's permission, but grandparents, aunts, uncles, and other relatives can open and manage custodial accounts. The relationship does not matter legally—only that you are an adult and the account is in the minor's name.

What is the difference between a custodial account and a 529 college savings plan?

A custodial account can be used for any purpose and the child controls it at 18 or 21. A 529 plan is specifically for education expenses, offers tax advantages, and you retain control even after the child turns 18. If the money is not used for college, a 529 has tax penalties; a custodial account has no restrictions.

Can I change my mind and close the account?

You can close the account and withdraw the money, but legally it belongs to the child. Withdrawing it for your own use is a breach of your duty as custodian. If the child is old enough to understand, they could challenge you later. It is safer to leave the account open or discuss a withdrawal with the child if they are a teenager.

Do I need the child's permission to open a custodial account?

No. You can open a custodial account without the child's knowledge or consent. The child does not need to sign anything or be present. However, once they turn 18 or 21, they will receive statements and will know the account exists.

What happens if I die before the child reaches adulthood?

The account does not automatically go to your estate. It belongs to the child and will be managed by the successor custodian you named when you opened the account—usually a spouse, sibling, or other trusted adult. If you did not name a successor, the court will appoint one. Name a successor custodian when you open the account to avoid this uncertainty.