What a custodial account is

A custodial account is a bank or investment account held in a child's name but controlled by an adult — usually a parent or guardian — until the child reaches a certain age. The adult, called the custodian, makes all the decisions about the money: deposits, withdrawals, and how it is invested. The child's name is on the account, the money belongs to the child legally, but the child cannot touch it or make decisions about it yet.

The custodian is responsible for managing the money in the child's best interest. When the child turns 18 or 21 — depending on which state you live in and which type of account you open — the account transfers to the child's full control. At that point, the custodian steps back and the young adult owns and manages the account themselves.

Custodial accounts are common for children who receive money from relatives, inheritance, or earnings from work. They are also used as a way to teach children about saving and money management as they grow older.

Key Takeaways

  • A custodial account is held in a child's name but controlled by an adult custodian until the child reaches 18 or 21, depending on your state and account type.
  • The custodian decides when and how money is spent, but the money legally belongs to the child from day one.
  • Two common types exist: UTMA (Uniform Transfers to Minors Act) accounts and UGMA (Uniform Gifts to Minors Act) accounts, with UTMA being newer and more flexible.
  • When the child reaches the age of majority set by your state, the account becomes theirs to control completely, and the custodian's role ends.
  • The money in a custodial account counts as the child's asset when explore for financial aid, which may reduce the amount of aid they receive.

UTMA and UGMA accounts: the two main types

Most custodial accounts are opened under one of two laws: UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act). UTMA is the newer law and is used in most states. It allows you to transfer almost any kind of property to a child — money, real estate, stocks, artwork — and name a custodian to manage it. UGMA is older and more limited; it covers only money and securities like stocks and bonds.

For most families opening a straightforward savings or checking account for a child, the difference between UTMA and UGMA does not matter much. Both work the same way: the adult controls the account until the child reaches the age set by your state's law, then the child takes over. The main practical difference is that UTMA gives you more options if you want to transfer property other than cash or stocks.

When you open a custodial account at a bank or brokerage, you will choose which law applies. The bank will tell you the age of majority in your state — usually 18 or 21 — and that is when the account automatically transfers to the child.

How money gets into and out of a custodial account

Anyone can deposit money into a custodial account — a parent, grandparent, relative, or even the child themselves if they earn money from a job. There is no limit on who can contribute or how much they contribute in a single year, though very large gifts may have tax consequences that the giver should discuss with a tax professional.

The custodian decides when and how money comes out. The custodian can withdraw money to pay for the child's needs: school supplies, medical care, sports equipment, tutoring, or everyday expenses. The custodian can also leave the money untouched to grow over time. Some custodians use the account as a savings tool and rarely withdraw anything until the child is older.

The child cannot withdraw money without the custodian's permission, even if it is their own account. This is the core protection of a custodial account — it keeps the money available for the child's future rather than letting the child spend it all when ready.

Tax treatment of custodial accounts

Money in a custodial account earns interest or investment returns, and that income is taxed. The tax is paid by the child, not the custodian, because the money belongs to the child. For 2024, the first portion of a child's investment income is taxed at the child's (usually lower) tax rate, and income above a certain threshold is taxed at the parent's rate. The exact threshold changes each year, so check the IRS website or ask a tax professional for the current year's rules.

If the child has earned income from a job — like babysitting or a part-time job — that income is also taxed, but the child may not owe any tax if their total income is below a certain level. A custodian should keep records of all deposits and earnings to report accurately at tax time.

What happens when the child turns 18 or 21

On the date set by your state's law — usually the child's 18th or 21st birthday — the custodial account becomes the child's property to control completely. The custodian's authority ends. The child can then withdraw money, close the account, change how it is invested, or do anything else they want with it. The bank or brokerage will handle the transfer automatically; you do not need to file paperwork or go to court.

This transition can be a significant moment. Some young adults are ready to manage money responsibly; others are not. Some custodians have conversations with the child beforehand about how to use the money wisely. Others straightforward hand over the account and let the young adult learn through experience.

How custodial accounts affect financial aid

Money in a custodial account is considered the child's asset when the child or family applies for federal financial aid for college. The federal aid formula counts a portion of the child's assets toward the expected family contribution — the amount the family is expected to pay out of pocket. This means a custodial account can reduce the amount of need-based financial aid the child receives.

The impact varies depending on how much money is in the account and the family's total income and assets. A small custodial account may have little effect; a large one may significantly reduce aid. Families planning to save for college should discuss this with a financial aid counselor or tax professional, because there are other savings vehicles — like 529 plans — that may have a smaller impact on aid.

Custodial accounts versus other ways to save for a child

A custodial account is one option for holding money for a child, but it is not the only one. A 529 plan is a tax-advantaged savings account specifically for education expenses; money in a 529 is treated more favorably for financial aid purposes than money in a custodial account. A Coverdell ESA (Education Savings Account) is another education-focused option with tax benefits. A regular savings account in the parent's name is simpler but offers no tax advantage.

The right choice depends on your goals. If you want to save for education and reduce the financial aid impact, a 529 plan may be better. If you want to give a child money for any purpose and teach them about managing it, a custodial account works well. If you want simplicity and do not mind the financial aid impact, a regular account in your name is fine. Many families use more than one approach.

Frequently Asked Questions

Can I change who the custodian is?

No, you cannot change the custodian after the account is opened. The custodian is named when you open the account and remains the custodian until the child reaches the age of majority. If the custodian dies or becomes unable to manage the account, the account may pass to an alternate custodian if one was named, or the court may appoint someone. Plan ahead and name an alternate custodian when you open the account.

What if the child needs the money before they turn 18 or 21?

The custodian can withdraw money at any time for the child's benefit — medical care, education, housing, or other needs. There is no rule that says you must wait until the child is older. The custodian straightforward decides whether the withdrawal is in the child's best interest and makes it happen.

Does the child know the account exists?

That is up to you. Some parents tell the child about the account and involve them in decisions as they grow older. Others keep it private until the child is older. There is no legal requirement either way. Many parents find it helpful to tell the child about the account as a way to teach about saving and money management.

Can a custodial account be used for anything other than savings?

Yes. You can open a custodial checking account so the child can learn to use a debit card and manage everyday spending. You can also open a custodial investment account to buy stocks or mutual funds. The rules are the same — the custodian controls it until the child reaches the age of majority — but the account can hold different types of assets depending on what the bank or brokerage offers.

What happens if the custodian spends the money on themselves?

The custodian is legally required to manage the money in the child's best interest, not their own. If a custodian misuses the money, the child or another adult can take legal action. This is rare, but it is why it is important to choose a custodian you trust completely — usually a parent or close family member.