Custodial Investment Accounts for 2023 – Pros and Cons
Custodial investment accounts help you save for your child’s future. We reviewed the best custodial accounts based on account features, fees, customer experience, and more.
Custodial investment accounts (often called UTMA or UGMA) are accounts managed by an adult on behalf of a minor.
When a child turns 18 or 21, the brokerage will turn over the account to the child. At that point, the money is theirs and they can use it as they wish.
UGMA and UTMA accounts don’t have all the tax and aid advantages of traditional educational savings accounts, but they offer greater flexibility for recipients.
Funds inside a UGMA or UTMA can be used for anything from college tuition to a business to a new car.
What Is Custodial Investment Account
A custodial account is a financial account that is opened and controlled by someone over 18 for a minor. Often, a custodial account is opened by a parent for their child.
There are two main types of custodial accounts: the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA).
The largest difference between the UGMA and UTMA is that the UTMA covers more assets. For instance, with a UGMA account, you can include assets such as stock, bonds, and mutual funds.
With a UTMA, you can also include assets such as real estate, jewelry, and art. Grandparents, other family members, and even friends can also open a custodial account for a minor.
Custodial Investment Account for Minors
Since minors do not have the right to purchase investment securities like stocks, bonds, and index funds, an adult has to serve as the account’s custodian.
Typically, a parent or grandparent would open a custodial account for a child to save for the future or give financial gifts.
Custodial accounts also allow for a transfer of assets to minors when they reach legal adulthood. There are two general types of custodial accounts: UTMAs and UGMAs.
The UGMA custodial account allows you to hold financial assets like stocks, bonds, index funds, certificates of deposit, cash, and insurance policies, while the UTMA goes beyond traditional assets and allows you to hold asset classes like real estate or fine art.
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Opening a custodial account is similar to opening any brokerage account. You will need the child’s personal information, as well as your own.
Initially, the account will be in your name. Once you’ve opened the account, then you can choose investments on behalf of the minor.
Custodians make all the account’s investment decisions until the account is transferred when the child is old enough.
Custodial accounts are what is known as an irrevocable gift. This means custodians must transfer the account to the beneficiary, usually at the age of majority as required in your state, typically 18 or 21.
Brokerage Account Definition
A brokerage account is a must-have if you want to be a great investor. With a brokerage account, you can buy and sell stocks along with a host of other investments that can help you reach your financial goals.
The more time you have to invest, the more likely you are to achieve the growth in your portfolio that you’re seeking to attain.
But what if you want to open an investment account for a child? Most brokers and financial institutions won’t let minor children open accounts directly.
If you want your children to have their investments, then opening custodial brokerage accounts can be a great solution that will open their eyes to the possibilities of the investing world.
Benefits of a Custodial Brokerage Account
1. 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;
Says Shari Greco Reiches, wealth manager, and behavioral finance expert at Rappaport Reiches Capital Management, based in Evanston, Illinois. She points out that the beneficiary can use the funds for any reason.
2. Parents, grandparents, other family members, or friends can gift money to a child in a custodial account. This is an easy way to grow the account.
3. A custodial account can also serve as an opportunity to teach children the value of investing and how to build wealth from a young age.
This can be an opportunity for custodians to show minors financial investments that are held in the account and explain how investing works.
This can be a great way to educate children on how to manage money for the long term starting from a young age.
4. Another benefit is that there is flexibility when it comes to managing activities in a custodial account.
Contributions to the account can come from parents, family members, and friends, and custodial accounts do not have contribution limits.
While there is no minimum amount needed to open this type of account, the investments you choose may require a minimum.
5. Account withdrawals can be made even when the beneficiary is a minor, though these must be for the benefit of the minor, such as covering costs for education or medical bills.
Best Custodial Investment Account
Custodial accounts can be savings or investment accounts and are usually held at a bank, brokerage, or other financial institution.
Once the child comes of age (usually between the age of 18 and 25), they take over ownership and control of the account.
The best custodial accounts are those that charge no account fees, no minimum initial deposit and allow for fractional shares.
1. Best Overall: Charles Schwab
2. Best for Mutual Funds: Vanguard
3. Best Investing App: Stockpile
4. Best Robo Advisor: Acorns
5. Best Educational Resources: Loved
6. Best Custodial Bank Account: Ally Bank
1. Charles Schwab
Charles Schwab is our choice for the best overall custodial accounts because of its longevity in the industry, its strong customer support, and its minimal fees.
‣ Long company history
‣ No contribution limits
‣ No minimum open deposit
‣ No cryptocurrency trading
The Charles Schwab Corporation was founded in 1971 in San Francisco. At the time, it was a traditional brokerage company, but in 1974 it pioneered many things in the discount brokerage business.
Its long history in the industry in addition to its low fees is why it wins as our choice for the best custodial account.
The Schwab One Custodial Account is a brokerage account that comes with investment help and guidance.
With the Schwab One Custodial Account, there are no contribution limits, no minimum opening deposit is required, no maintenance fees, and no commissions for online stock and ETF commissions.
Additionally, you get access to 24/7 service and support.
We chose Vanguard as the best custodial account for mutual funds because of its broad offerings of mutual funds.
‣ No enrollment, transfer, or advisor fees
‣ Low-cost mutual funds
‣ No fractional shares
Vanguard has been around since 1975 and is one of the largest investment management companies in the world with about $8.3 trillion in global assets.
With Vanguard, you can choose from a variety of accounts including individual and joint accounts, 529 savings plans, as well as UGMA and UTMA custodial accounts.
A Vanguard custodial account offers customers a broad lineup of mutual funds, some of the lowest expense ratios in the industry, and custom scheduling to fund your custodial account.
Vanguard is our choice for the best custodial account for mutual funds because it is known for its low-cost index fund products.
Stockpile wins for the best investing app because its app makes setting up a custodial account incredibly efficient and easy.
‣ Educational resources
‣ Gift cards for stocks
‣ Fractional shares
‣ No joint accounts
‣ No retirement accounts
Stockpile is an online digital brokerage that was founded in 2010 and is headquartered in Palo Alto, California. Stockpile offers individual brokerage accounts and custodial accounts.
We chose Stockpile as our pick for the best investing app because it makes setting up a custodial account for a minor incredibly easy.
Better yet, Stockpile eliminated trading fees in July of 2021 and is increasing its focus on building financial literacy among its users.
Simply open the sidebar menu in the Stockpile app, tap “Add account,” choose “Custodial (Adult)”, and fill out the required information.
Acorns are our pick for the best Robo advisor because of its easy-to-set-up custodial accounts, breadth of helpful educational resources, and access to family financial advice.
‣ Good educational resources
‣ Access to a full-financial wellness system
‣ Easy to set up custodial accounts
‣ Flat fees can be high for small account balances
Acorns were launched in August 2014 to make investing accessible to everyone. Today, Acorns serves over nine million users. There is no account minimum for Early.
We chose Acorns as the best Robo Advisor for custodial accounts because of the Acorns Early investing feature for kids. A UTMA or UGMA account can be opened for a minor in under three minutes.
Early is built into the larger Acorns platform which offers a full financial wellness system.
You can set up custodial accounts for your kids, personal investment accounts for yourself, as well as retirement accounts, and checking accounts all for a flat fee of $5 per month.
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Loved is our choice for the best educational resources for custodial accounts because its mission is to empower children and families through financial education and opportunities.
‣ Good educational resources
‣ Commission-free investing
‣ Not a long history or track record
‣ Goal setting feature is weak
‣ Limited stock options
Loved is on a mission to give your young ones the information and support they need to lead their most successful life.
Founded in 2017, Loved is a relative newcomer to the mobile investment platform space. However, it is specifically focused on providing parents and other adults with the resources they need to support their children’s financial education.
Loved offers commission-free custodial accounts. With a Loved custodial account, you can start investing for anyone under 18 years old with as little as $5.
Getting started is easy and you can be ready to invest in a matter of minutes. You can build a portfolio based on different themes, companies, or specific goals.
6. Ally Bank
Ally Bank is our choice for the best custodial bank account because of its Online Savings Account that comes with no monthly maintenance fee, no minimum balance, and a generous APY.
‣ No monthly maintenance fee
‣ No minimum balance requirements
‣ APY of 0.50%
‣ No joint accounts for minors
Ally Bank, formerly GMAC, a division of GM, opened its doors in 1919. While its initial focus was auto financing, Ally has since expanded to online banking, credit, lending, as well as wealth management.
Ally Bank is our choice for the best custodial bank account because it offers Online Savings Accounts that can be easily opened for minors.
Its online savings account comes with no monthly maintenance fees and no minimum balance requirements. You also can earn almost 9x the national average for APY (0.06%), as Ally offers an APY of 0.50%
Comparing the Best Custodial Accounts
A custodial account is an irrevocable gift and must be turned over to the child when they reach the age of maturity, typically 18 or 21 (or up to 25).
Minimum Opening Deposit
Purchase fractional shares for as little as $5
Best for Mutual Funds
|Brokerage account||$20 annual account service fee (can be waived)||The minimum initial investment of $3,000 for most Vanguard mutual funds||
Vanguard’s average mutual fund expense ratio is 0.10%. The industry average mutual fund expense ratio is 0.60%.
Best Investing App
Give the gift of stocks with Stockpile e-gift cards
Best Robo Advisor
|Brokerage account||$5 per month||$0||Open a kid-friendly investment account in under 3 minutes|
Best Educational Resources
Can invest as little as $1 at a time
Best Custodial Bank Account
|Online savings account||$0||$0||
APY of 0.50%
How to Set Up a Custodial Investment Account
A custodial account is opened and managed by an adult for a minor. A custodial account requires a fiduciary relationship between the minor and the adult custodian.
This means that the custodian must make financial decisions that are in the best interest of the child who is named on the account.
The custodian is responsible for managing the account and making all financial decisions until the minor comes of age. At that time, the minor takes control.
Types of Custodial Accounts
There are two main types of custodial accounts. The Uniform Gift to Minors Act (UGMA) allows minors to own gifts including cash, stocks, bonds, mutual, funds, and securities.
The Uniform Transfer to Minors Act (UTMA) is similar to the UGMA but also allows minors to own other types of property including real estate.
Do Custodial Accounts Get Taxed?
Custodial accounts do get taxed. However, a benefit of the UGMA and UTMA custodial account is that when you invest money on a child’s behalf, the income gets taxed to the child rather than the custodian.
Since most children have little or no income, they can get taxed at a lower rate than their parents. Unearned income from $0 to $1,100 is tax-free if the child has earned no income.
Unearned income above $2,200 is taxed at the parent’s marginal tax rate if the child has no earned income.
Advantages of a Custodial Account
One benefit of custodial brokerage accounts is that they allow you to continue to invest money on behalf of a child without you having to hold legal ownership of those assets.
That is particularly valuable for income tax purposes because unearned income in a custodial account typically gets taxed to the child rather than to the person managing the account.
Because most children have little or no earned income, they’re often in lower tax brackets than their parents or other relatives, and so having investment income taxed on their returns can lead to lower tax bills or even no tax liability at all.
Disadvantages of Custodial Accounts
Despite their benefits, custodial accounts aren’t perfect. One common problem is that when a child who has a custodial account goes to college, the assets in that account are treated as if they belong to the child.
That can have a much larger negative impact on the amount of financial aid that the child receives than if the money were held in a parent’s brokerage account or a tax-favored vehicle like a 529 college savings plan.
But the biggest downside for many parents is the fact that custodial accounts require the custodian to turn over the account to the child at whatever age the state in question says is the legal age of majority.
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Before You Open a Custodial Investment Account
Custodial accounts can be a useful way to transfer money to the next generation. But these accounts have some drawbacks.
These are a few things to consider before opening a UGMA or UTMA account for your child.
1. Can’t take it back – Unlike educational savings accounts, a UTMA is an irrevocable gift. It will be turned over to the account holder at the age of majority in your state.
There is no “out” clause if your child is irresponsible.
2. May be subject to gift taxes – Minors won’t be taxed if you over-contribute to their account. But gifts over $15,000 per year could be taxed.
3. Kids can use the money for anything – Once the account is turned over to a child, they can use the funds for whatever they want.
They may be prudent, but they may also blow the money on something frivolous.
4. Financial aid may be affected – Custodial accounts tend to have an outsized effect on a child’s ability to receive need-based college aid. If the goal is educational savings, other accounts may be better.
Frequently Asked Questions
Popular questions and answers hovering over custodial investment accounts are elicited below.
Custodial accounts can be savings or investment accounts and are usually held at a bank, brokerage, or other financial institution.
Investment accounts for kids
To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one.
15. Do custodial accounts affect financial aid?
Custodial accounts can have a heavy impact on financial aid.
Because the money in a custodial account is your child’s asset and not yours, federal financial aid formulas consider 20% of the money available to pay for college.
Compare this to 529 plans, which are given more favorable treatment for financial aid.
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