A custodial account is a bank or investment account opened in a child's name, with an adult managing it until the child reaches the age of majority

The adult — usually a parent, grandparent, or other relative — deposits money into the account and makes all decisions about how it is used while the child is a minor. When the child turns 18 or 21 (depending on your state and the account type), the account transfers to their full control, and they become the legal owner.

The account exists in the child's name from the start, which means the money belongs to the child, not the adult managing it. This is different from a regular savings account that a parent might open for themselves. A custodial account is a legal structure that protects the money for the child's benefit and has tax consequences that differ from a parent's own account.

Key Takeaways

  • A custodial account is opened in your child's name with you as the custodian, and the money legally belongs to your child from the moment you deposit it.
  • Two main types exist: UTMA (Uniform Transfers to Minors Act) accounts and UGMA (Uniform Gifts to Minors Act) accounts, with UTMA being newer and available in more states.
  • The child gains full control of the account when they reach the age of majority — usually 18 or 21, depending on your state and account type.
  • Custodial accounts have tax advantages for smaller balances, but earnings above a certain threshold are taxed at the child's rate rather than yours.
  • Once the child takes control, you have no say in how they spend the money, so use this structure only for money you intend for them to have.

UTMA and UGMA accounts: The two types

Most custodial accounts are opened under one of two laws: the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). UTMA is the newer law and is available in all 50 states. UGMA is older and available in most states but is being phased out in favor of UTMA.

The practical difference is narrow: UTMA accounts can hold a wider range of assets (real estate, artwork, patents) while UGMA accounts are limited to cash, securities, and insurance. For most families saving for a child, this distinction does not matter — both work the same way for bank deposits and investment accounts. When you open a custodial account, the bank or brokerage will tell you which law governs it in your state.

How money moves in and out

You deposit money into the account whenever you choose. Grandparents, aunts, uncles, and other relatives can also deposit money directly into the account if they know the account number. The account number is the child's, so any money deposited becomes the child's property when ready.

While the child is a minor, you as the custodian decide how the money is spent. You can withdraw it for the child's benefit — education, medical care, living expenses, or other needs. You cannot withdraw it for your own use; the law requires that money in a custodial account be used for the child's benefit only.

Once the child reaches the age of majority (18 or 21, depending on your state and account type), the account is theirs to control. They can withdraw all of it, leave it invested, or do anything else they choose. You have no legal say in what happens next.

Tax treatment of custodial accounts

Custodial accounts have a tax advantage for smaller balances. The first portion of earnings in the account is taxed at the child's rate, which is usually lower than yours. For 2024, the first $1,450 of unearned income (interest, dividends, capital gains) is tax-free for a dependent child. The next $1,450 is taxed at the child's rate. Earnings above that are taxed at the parent's rate.

These thresholds change each year, so check the IRS website or ask your tax preparer for the current year's limits. The key point: if you are saving a small amount for a child, the tax advantage can be real. If you are depositing tens of thousands of dollars, the tax benefit shrinks because most of the earnings will be taxed at the parent's rate anyway.

You will receive a 1099 form each year reporting the earnings in the account, and you will report them on your tax return. The account itself does not file a separate return unless earnings exceed a threshold set by the IRS.

When a custodial account makes sense

A custodial account works well if you want to set aside money for a specific child and you trust that they will use it responsibly once they turn 18 or 21. It is straightforward to open, costs little or nothing, and the tax advantages help with smaller balances.

A custodial account is less suitable if you want to control how the money is spent after the child reaches adulthood. Once they take control, the money is theirs — you cannot require them to use it for college, a car, or anything else. If you want that level of control, a trust (set up through a lawyer) is a different legal structure that allows you to set conditions on how and when money is spent.

Custodial accounts also affect financial aid calculations. Money in a custodial account in the child's name counts as the child's asset when explore for college financial aid, which can reduce the aid they receive. Money in a parent's account counts as a parent asset and has less impact on aid. If financial aid is a priority, discuss this with a financial aid counselor before opening a custodial account.

Opening a custodial account

Most banks and investment firms offer custodial accounts. You can open one at your current bank, a credit union, or a brokerage firm. The process is similar to opening a regular savings account: you provide your identification, the child's Social Security number, and initial deposit amount.

The account will be titled something like "Jane Smith, Custodian for Michael Smith Under the [State] Uniform Transfers to Minors Act." This title makes clear that you are the custodian, not the owner, and that the money belongs to Michael.

Some institutions have minimum deposit amounts or monthly fees. Shop around — many banks offer custodial savings accounts with no minimum and no monthly fee. If you want to invest the money in stocks or mutual funds rather than keep it in savings, you will need to open the account at a brokerage firm.

What happens when the child turns 18 or 21

The age at which the account transfers to the child's control depends on your state and the account type. Most states use age 18 for UTMA accounts and age 21 for UGMA accounts, but this varies. Check with your bank or the state's financial regulator to confirm the age in your state.

When the child reaches that age, the custodian's authority ends. The account becomes a regular account in the child's name, and they have full legal right to withdraw and spend the money however they wish. You cannot prevent this transfer, and you have no say in what happens next.

If you want to discuss the account with your child before they turn 18 or 21, that is your choice — many parents do. But legally, once they reach the age of majority, it is their decision alone.

Frequently Asked Questions

Can I change my mind and take the money back?

No. Once you deposit money into a custodial account, it belongs to the child. You cannot withdraw it for your own use or close the account and keep the balance. You can only withdraw it for the child's benefit — education, medical care, living expenses, and similar needs.

What if the child dies before reaching adulthood?

The money in the account becomes part of the child's estate and is distributed according to the child's will or, if there is no will, according to your state's inheritance laws. This is one reason to discuss custodial accounts with an estate planning lawyer if you are setting aside a large amount of money.

Does a custodial account affect my child's ability to get student loans?

Yes. Money in a custodial account in the child's name counts as the child's asset on the Free process for Federal Student Aid (FAFSA), which can reduce the amount of need-based financial aid they receive. Money in a parent's account has less impact. If your child may need financial aid, discuss this with a financial aid counselor before opening a custodial account.

Can I name someone else as custodian if something happens to me?

You can name a successor custodian when you open the account, and that person will take over if you die or become unable to manage the account. Confirm with your bank or brokerage what their process is for successor custodians, as it varies by institution.

Is a custodial account the same as a trust?

No. A custodial account is simpler and cheaper to set up, but it gives you less control. A trust is a legal document that can set conditions on how money is spent and can delay when the child gains control. Trusts require a lawyer to set up and cost more, but they offer more flexibility. For small amounts, a custodial account usually makes sense. For large amounts or if you want specific conditions on spending, a trust may be better.