Learn how custodial brokerage accounts empower adults to manage investments for minors, offering tax benefits and flexible options for building wealth.
A custodial brokerage account lets adults manage investments for minors, helping them build wealth early. Here's a quick breakdown:
- What It Is: An account where adults manage investments for minors until they reach legal adulthood (18–21, or up to 25 in some states).
- Who Benefits: Parents, grandparents, or family friends looking to secure a child’s financial future.
- Key Features:
- Investment options include stocks, ETFs, bonds, and more.
- Tax benefits: The first $1,350 of unearned income is tax-free.
- Annual gift tax exclusion: Up to $19,000 per person in 2025.
- Types:
- UGMA: Covers financial assets like stocks and bonds.
- UTMA: Includes broader assets like real estate and patents.
- How to Open: Choose a broker, fill out an application, and fund the account.
Custodial accounts are simple to set up, offer flexible investment options, and help teach kids about money management. Ready to start? Let’s dive into the details.
How to Open a Custodial Brokerage Account With Vanguard
Basic Account Structure
Custodial brokerage accounts are designed to let adults manage investments on behalf of minors, ensuring secure oversight until the child reaches adulthood.
Roles and Duties
Two main roles define these accounts: the custodian (adult manager) and the beneficiary (minor owner). Adam Frank, Managing Director at J.P. Morgan Wealth Management, explains:
"The custodian of the account controls how money in it is invested and spent."
The custodian's responsibilities include:
- Managing investments and using funds solely for the minor's benefit
- Keeping detailed records
- Handing over control when the minor reaches legal age
While minors technically own the assets, they only gain control once they reach the age of majority, typically between 18 and 21, depending on the state. In some cases, this age can extend to 25.
UGMA and UTMA Accounts
Custodial accounts fall into two main categories, each with its own features:
| Feature | Assets | Availability | Transfer Age |
|---|---|---|---|
| UGMA | Financial assets like stocks, bonds, cash, and insurance | Available in all states | Varies by state (18–21) |
| UTMA | Broader options, including real estate, art, and patents | Not available in Vermont and South Carolina | Varies by state (18–21) |
For 2024–2025, you can contribute up to $18,000 annually ($36,000 for couples) to these accounts without triggering gift tax.
When deciding between UGMA and UTMA accounts, consider these factors:
- The types of assets you want to transfer
- Your state’s specific rules
- Your overall investment goals
- How much complexity you're comfortable managing
Opening an Account
Who Can Open an Account
A custodial brokerage account can be opened by adults like parents, grandparents, relatives, or family friends on behalf of a minor. To qualify as a custodian, you must be a U.S. resident with a valid Social Security or tax ID. You'll also need the minor's Social Security number and birth date. The beneficiary must be under the age of majority, usually 18 or 21, depending on the state.
Setup Process
Opening a custodial account involves just three steps:
-
Pick the Account Type
Decide between UGMA or UTMA, based on your state laws and the assets you plan to hold. -
Fill Out the Application
Have your and the minor’s tax IDs, birth date, employment info, and bank details ready. Online setup can take as little as 10 minutes. -
Fund the Account
Transfer money electronically or via mobile deposit.
Picking a Broker
Selection Criteria
When choosing a broker, evaluate fees, available investments, user experience, and educational tools. Look for no‐commission trading, no maintenance fees, and strong research or robo‐advisory options.
Top Brokers Overview
| Broker | Rating | Key Features | Best For |
|---|---|---|---|
| Interactive Brokers (IBKR Lite) | 5.0/5 | Commission‐free trading, global markets | Advanced investors |
| Charles Schwab | 4.8/5 | No minimum deposit, research tools | Versatile investors |
| Acorns | 4.6/5 | Automated portfolios, low fee | Hands‐off investors |
| Vanguard | 4.4/5 | Low‑cost index funds, retirement tools | Long‑term planners |
"The advantage of custodial accounts like a UGMA or UTMA is that you can easily save and invest toward your child's future. Plus, custodial accounts are easy to set up and more flexible than 529 plans." – Tessa Campbell, Personal Finance Insider
Account Management
Adding Money
No annual contribution limit, but gifts above $19,000 (or $38,000 for couples) may incur gift tax.
- Bank transfer: One‑time or recurring deposits.
- Securities transfer: Move existing investments in.
- Third‑party gifts: Family contributions for birthdays, etc.
What You Can Buy
| Investment Type | Available? | Notes |
|---|---|---|
| Stocks | Yes | Fractional shares at some brokers |
| ETFs | Yes | Many are commission‑free |
| Mutual Funds | Yes | Index or active |
| Bonds | Yes | Gov’t & corporate |
| CDs | Yes | FDIC‑insured |
| Options | Yes | Select platforms only |
| Margin Trading | No | Not permitted |
Account Maintenance
- Performance: Review returns, dividends, and fees.
- Taxes: In 2025, first $1,350 of unearned income is tax‑free; next $1,350 taxed at child’s rate; above $2,700 at parent’s rate.
Rules and Taxes
Transfer of Control
At the age of majority (18–25, by state), control must shift to the beneficiary. Brokers will notify you when to transfer.
Tax Rules
The Kiddie Tax may apply: gifts over the annual exclusion ($18,000 in 2024) count toward lifetime exemptions; unearned income above thresholds is taxed at higher rates.
Taking Money Out
Withdrawals are penalty‑free if used for the minor’s benefit (education, housing, medical, etc.). Keep records to demonstrate eligible use.
Summary
Benefits of Custodial Accounts
Custodial accounts are easy to open, offer tax perks on the first $1,350 of earnings, and provide a broader investment universe than 529 plans.
"A custodial account is easy to open, and with its simplicity, it can be a good alternative to a trust, which generally requires a lawyer." – Shari Greco Reiches, Rappaport Reiches Capital Management
How to Open a Custodial Account
| Step | Action | Tip |
|---|---|---|
| Choose Broker | e.g., Charles Schwab, Fidelity | No minimums & commission‑free |
| Set Up | Submit details & docs | ~15 minutes online |
| Add Funds | Bank transfer | Start with as little as $1 |
| Pick Investments | Diversify | Index funds & ETFs |
