Best Custodial Accounts for April 2024

Custodial accounts are designed to allow parents or other adults to gift and invest money on behalf of a minor child. Unlike other types of accounts designed to hold money for minors, such as college savings plans, custodial accounts don't have any specific purpose for the money held within them, nor do they have contribution limits.

The two main types of custodial accounts are UGMA and UTMA accounts. In this article, we'll go over how these accounts work, the main differences between them, and other things you should know before opening an account. And we'll share our picks for best brokerages for custodial accounts.

2 Featured Picks From Our Best Custodial Accounts

There are a lot of options to compare, even on this page. It can be overwhelming! If you're looking for a place to start, here are some custodial accounts our experts recommend and why they like them:

• Fidelity: Great custodial broker for mutual funds
• Acorns: Standout "hands-off investing" custodial broker

How to choose the best custodial account for you

Choosing a broker for a custodial account may feel like a hassle, but it's simpler than it appears. Here's how to get started:

1. Compare fees. Especially note the costs associated with the type of investments you (or your child) will be making. The best custodial accounts for kids charge no account fees and require no minimum initial deposit.
2. Compare services. While most large brokers offer custodial accounts, features and services vary tremendously.
3. Define what you plan to put in the account to determine the account type. If you're unsure whether you want to open a UGMA or UTMA account, consider whether you plan to hold non-financial instruments. If you plan to put personal property -- like real estate or precious coins -- into the account, you'll need to open a UTMA.

How to open a custodial account

Custodial accounts are typically easy to open, especially if you use an online-based broker like those on our favorites list. Here are the basic steps you'll take.

Documents needed to open a custodial account

Before you start, you'll need to gather some documents. These include:

• Your Social Security Number (SSN), address, and date of birth.
• The child's SSN or Taxpayer Identification Number (TIN), legal name, and date of birth.

Open a custodial account online

• Visit the broker's website and look for a button that reads “Get Started” or “Open Account.”
• You'll be prompted to provide information and documentation. Follow along with the prompts.
• Take a final look at the terms and conditions. If there are any details you don't understand, contact the broker for clarification.
• Once you're sure you understand the terms and conditions (including fees), submit your application electronically.

Open a custodial account in person

• Bring the required documents mentioned above to the branch or office nearest you.
• If your child is old enough and you want to involve them in the process, bring them along.
• A brokerage representative will guide you through the account opening process. One advantage of having a representative sitting there with you is that you have immediate access to any questions you may have.
• Review and sign any account agreements and disclosures.

Custodial account rules

Managing a custodial account may seem intimidating, especially if you've done so before. However, once you become accustomed to the rules, you'll quickly feel like a pro. Here's a quick review of basic custodial account rules:

• Although parents, grandparents, guardians, friends, and family members may all contribute to a child's custodial brokerage account, only the person who set up the account can choose how the money is invested.
• Custodial brokerage accounts have no contribution limits, allowing you to invest as much as you want. However, contributing more than $18,000 (or $36,000 per couple) in one year to a single recipient may lead to owing gift taxes.
• The account custodian is responsible for filing the proper tax forms and ensuring any taxes owed are paid.
• A custodial broker account offers a wide range of investment options, including everything from exchange-traded funds (ETFs) to mutual funds and individual stocks.
• The custodian controls the account until the child reaches the age of 18 or 21 (depending on the state of residence). Some states allow the custodian to select a later access age if they so desire.
• Any money put into a custodial brokerage account belongs to the child irrevocably. A custodian cannot withdraw money for personal use, but can withdraw funds to make purchases that are solely for the child. For example, if a child needs braces, those funds can come from the account. However, money withdrawn from the account creates taxable gains.
• Once the child is old enough to access their account, the funds can be used for any purpose.
• Money contributed into one child's custodial account cannot be transferred to another person (child or adult).
• Because the money in a custodial brokerage account legally belongs to the child, it may impact the child's Free Application for Federal Aid (FAFSA) calculations, leading to less financial aid for higher education.

Custodial account taxes

Are custodial accounts entitled to any special tax benefits?

Custodial accounts are not entitled to any special tax benefits -- at least not directly.

At what rate are funds withdrawn from a custodial account taxed?

Because the money in a custodial account is the legal property of the minor, some or all of the capital gains or income earned in the account will be taxed at the child's tax rate. Specifically, for 2023, the IRS allows every child under 19 (or full-time students under 24) to receive as much as $1,250 in unearned income tax-free, with the next $1,250 taxed at a favorable rate.

Note that this is referring to income, not investment gains. For example, if you buy a stock in a custodial account for $1,000 and its value rises to $10,000, you won't owe a penny of tax on the gain unless you sell it. However, any dividends or distributions received in the account will count. Under current tax law, any income beyond $2,500 in the custodial account will be taxed at the parent's rate until the child reaches the age of majority in their state, so this might be worth considering if you're planning to put relatively large amounts of money in custodial accounts.

At what point will I have to pay a gift tax on the funds I contribute to a custodial account?

Individuals can contribute as much as $18,000 to a custodial account without counting toward their lifetime estate tax exclusion (married couples can contribute $36,000). But beyond that, it can potentially result in federal gift tax liability.

What is a custodial account?

"Custodial account" is a somewhat broad term that typically refers to an account at a financial institution set up for a minor, but that is controlled by an adult. For example, approval from the account's custodian would be required before using money in a custodial account to buy a specific stock investment.

Here are a few defining characteristics of custodial accounts:

• Money in a custodial account is the legal property of the minor, even though they don't control it. This is a key difference between custodial accounts and college savings accounts. Money in a 529 savings plan, for example, remains the property of the person who opened the account.
• Any money you contribute to a custodial account is irrevocable, which means it can't be taken back.
• There are no distribution requirements or maximum contribution limits.
• Money in a custodial account will be under the control of the minor once they reach the legal age of majority in their state.

Custodial accounts can be opened with most major brokerages and can be used to invest in a variety of assets like stocks, mutual funds, or ETFs. They come in two main varieties: UGMA and UTMA accounts. Let's go through the similarities and differences.

Types of custodial accounts

UGMA Custodial accounts

"UGMA" stands for "Uniform Gift to Minors Act." These accounts can be used to hold financial assets, including cash, stocks, mutual funds, ETFs, bonds, insurance policies, and annuities. They are allowed to be opened by residents of all 50 states.

UTMA Custodial accounts

"UTMA" stands for "Uniform Transfer to Minors Act" and is the newer of the two types of custodial accounts. Unlike UGMA accounts, UTMA accounts can be used to hold just about any type of asset you can think of (this is the big difference between the two). You can place real estate into a UTMA account, as well as things like artwork and collectibles, just to name a couple of examples. UTMA accounts are available in every state except South Carolina.

Similarities between UGMA and UTMA accounts

Aside from the broader variety of assets that can be held within UTMA accounts, these two types of custodial accounts are essentially the same. Just to name some of the key similarities:

• Both are set up by a custodian (often the minor's parent, but not necessarily).
• There are no minimum or maximum deposit requirements. You can start a custodial account with $1, or you can deposit $1 million (although the latter may have gift tax implications).
• Most major brokerage firms offer both. Fees and available investments mainly depend on the broker.

Brokerages we evaluated for consideration on this page: Acorns, Ally Invest, Axos Self-Directed Trading, Betterment, Cash App Investing, Charles Schwab, Delphia, Domain Money, Ellevest, Empower, eToro Brokerage, E*TRADE Core Portfolios, E*TRADE, Fidelity, Fidelity Cash Management, Fidelity Go®, Firstrade, FOREX.com, Interactive Brokers, J.P. Morgan Self-Directed Investing, M1 Finance, Magnifi, Marcus Invest, Merrill Edge® Self-Directed, moomoo, NinjaTrader, Personal Capital, Plynk, Prosperi Academy, Public, Robinhood, Rocket Dollar, Schwab Intelligent Portfolios, SoFi Active Investing, SoFi Automated Investing, Stash, Stockpile, Tastytrade, Titan, Tornado App, TradeStation, Tradier, Vanguard, Vanguard Digital Advisor®, Wealthfront, Webull, Zacks Trade.