What's the difference between UTMA and UGMA accounts?

Both are custodial accounts, but UGMA (Uniform Gifts to Minors Act) only allows cash and financial securities like stocks and mutual funds. UTMA (Uniform Transfers to Minors Act) is broader and can also hold real estate, art, and other property. Most brokerages default to UTMA where the state allows it, since it covers everything UGMA does and more.

At what age does the money become the child's to control?

It depends on the state, typically 18 or 21, and in a handful of states you can choose an age up to 25 when you open the account. Once that age is reached, the custodian's control ends automatically and the account owner has full legal access to spend the funds however they choose, regardless of what you intended the money for.

Do custodial accounts affect financial aid eligibility?

Yes, more than a parent-owned 529 plan does. Custodial account assets are counted as the child's assets on the FAFSA, which are assessed at a much higher rate (20%) than parent assets (up to 5.64%), potentially reducing need-based financial aid more significantly. If college costs are the primary goal, compare this against a 529 plan before choosing.

Can I withdraw money from a custodial account for myself?

No. Once assets are transferred into a custodial account, the gift is irrevocable and must be used for the benefit of the minor. As custodian, you manage the account, but you cannot use the funds for your own expenses or for anything that isn't reasonably for the child's benefit.

How to Open a Custodial Account for Your Kids

If you want to start investing on behalf of a child — whether it’s birthday money, gifts from grandparents, or a deliberate long-term plan — a custodial account is one of the simplest ways to do it. Unlike a retirement account, there’s no age minimum, no earned income requirement, and you can open one the same day you decide to start.

What a Custodial Account Is

A custodial account is a brokerage account opened in a child’s name but managed by an adult custodian (usually a parent or grandparent) until the child reaches the age of majority in their state. You can deposit cash and invest it in stocks, ETFs, mutual funds, and bonds, just like a regular brokerage account — the difference is legal ownership. The money belongs to the child from the moment it’s deposited, even though you control the investments until they come of age.

There are two types, and the naming comes from the laws that created them:

UGMA (Uniform Gifts to Minors Act): Covers cash and financial securities only.
UTMA (Uniform Transfers to Minors Act): Covers everything UGMA does, plus real estate and other property. Available in every state except South Carolina and Vermont, which only offer UGMA.

Most major brokerages — Fidelity, Schwab, Vanguard — offer custodial accounts with no minimum deposit and no account fees, so the barrier to starting is genuinely low.

Step 1: Decide What You’re Actually Investing For

Before opening the account, get clear on the goal, because it changes which account type makes sense:

College costs specifically: A 529 plan is usually the better vehicle — it’s counted less harshly on financial aid forms and offers tax-free growth for qualified education expenses.
General wealth transfer or a flexible fund the child can use for anything as an adult (a first car, a house down payment, starting a business): A custodial account is the more flexible choice, since funds aren’t restricted to education.

Many families use both — a 529 for education-specific savings and a smaller custodial account for more general investing.

Step 2: Choose a Brokerage and Open the Account

The process mirrors opening any brokerage account:

Provide your own identifying information as the custodian (SSN, address, employment details)
Provide the child’s name, date of birth, and Social Security number
Choose UTMA or UGMA if your state offers both
Fund the account via bank transfer

Most brokerages complete this online in under 15 minutes.

Step 3: Choose Investments

A custodial account holds whatever you choose to buy, the same as any brokerage account. For a long time horizon — which most custodial accounts have, since the child is often young — a diversified, low-cost approach tends to outperform stock-picking. Broad market index funds are a common default for exactly this reason; if you’re new to the concept, our guide to index funds for beginners walks through how they work and why they’re a popular starting point for long-term investing.

Step 4: Understand the Tax Rules

Custodial accounts use “kiddie tax” rules. As of recent tax years, a child’s unearned investment income (interest, dividends, capital gains) is taxed at:

$0 up to a small annual threshold (tax-free)
The child’s own tax rate on the next portion
The parent’s marginal tax rate above that threshold

For most families with modest custodial account balances, this results in little to no tax owed in the early years, but it’s worth tracking as the account grows, since large accounts can eventually trigger meaningful tax at the parent’s rate.

Step 5: Know That the Money Isn’t Yours Anymore

This is the part people underestimate. The moment you deposit money into a custodial account, it’s an irrevocable gift — legally the child’s asset. You manage the investments as custodian, but you can’t withdraw funds for yourself, and once the child reaches the age of majority, they get full control regardless of what you hoped the money would be used for. If that lack of control is a dealbreaker, a parent-owned brokerage account or 529 plan (which retains parental control indefinitely) may fit better.

Building Good Habits Alongside the Account

A custodial account is a long-term project, but it pairs well with teaching kids near-term money habits too. If you’re also working on your own financial foundation, the same discipline that gets a family to save their first $1,000 in an emergency fund is worth modeling for kids as they get old enough to understand what the custodial account is actually doing.

The Bottom Line

Custodial accounts are one of the most accessible ways to start investing on a child’s behalf — low barrier to entry, flexible investment choices, and real tax advantages in the early years. The trade-off is permanence: the money becomes the child’s outright at the age of majority, with no way to redirect it later. If flexibility and simplicity matter more than lifetime control, it’s hard to beat.

Related reading: Index Funds for Beginners and How to Save $1,000 in 3 Months.