Custodial Account (UTMA/UGMA)

Any adult can open a custodial account at a bank, brokerage or fund company, using the child’s Social Security number. The person who opens it names a custodian, often a parent or grandparent, and each account has one minor and one custodian. After that, anyone can add money, and there is no contribution limit, no withdrawal penalty and no list of approved expenses.

The catch is ownership. The moment money goes in, it belongs to the child. The custodian must manage it prudently and may spend it only for the child’s use and benefit, such as summer programs, a computer, or college costs, never for the custodian’s own needs. Nobody can take a gift back.

In practice most custodial accounts are simply a taxable brokerage account or savings account titled to the child.

The two uniform laws differ mainly in what an account can hold. UGMA accounts are limited to cash, securities and insurance policies. UTMA accounts can hold nearly any kind of property, including real estate. Most states now follow UTMA, and otherwise the two work largely the same way.

The bigger difference from state to state is the handover age. When the child reaches it, the custodian must transfer everything, and from then on the young adult can spend it on anything, whatever the giver intended. The uniform act sets 21, and states adapt it. California, for example, hands the property over at 18 unless the transfer names a later age: up to 21 for a lifetime gift, or up to 25 when the money comes through a will or trust.

Interest, dividends and capital gains in the account are the child’s income, reported under the child’s Social Security number. That once let families shift investment income into a child’s low tax bracket. The kiddie tax now limits the benefit.

For 2026 a child with only investment income pays no tax on the first $1,350, covered by a dependent’s standard deduction. The next $1,350 is taxed at the child’s own rate. Anything above $2,700 of unearned income is taxed at the parents’ rate, figured on Form 8615, and that applies to qualified dividends and long-term gains as well, at the parents’ capital gains rates.

The kiddie tax covers children under 18 at year-end, 18-year-olds, and full-time students aged 19 to 23, the last two only if their earned income doesn’t exceed half their support. A common way to manage the tax is to realize gains gradually, keeping each year’s unearned income near the $2,700 line.

Each deposit is a gift from whoever makes it. Gifts up to the $19,000 annual exclusion per child in 2026 need no gift tax return, and larger ones just require filing Form 709; with a $15 million lifetime exemption in 2026, actual gift or estate tax is rare.

Financial aid is the bigger trade-off. On the FAFSA a custodial account is the student’s asset, and the Student Aid Index formula counts 20% of a student’s net worth toward what the family can pay, against at most 12% of parents’ assets before further adjustment. A 529 plan owned by a parent for a dependent student is reported as a parental asset instead, and retirement accounts aren’t counted at all.

For a child who has a disability, the timing of the handover matters for SSI. SSA ignores custodial property while the child is a minor, but the whole balance counts as the young adult’s income, then a resource, once the custodianship ends, which can exceed SSI’s $2,000 limit. An ABLE account is built to avoid that problem.

Several accounts can hold money for a child, and the right one depends on what the money is for. A custodial account gives the most freedom in how it is spent but the least control over the outcome, and its earnings are taxed every year. A 529 plan is built for education, keeps a parent in charge and grows tax-free for qualified costs. A custodial Roth IRA needs the child to have earned income from a job, but decades of tax-free growth can make it the most valuable of all. The newest option, a Trump Account, is a traditional IRA for children under 18 that can receive contributions from July 4, 2026, and eligible children born from 2025 through 2028 can get a one-time $1,000 federal deposit. If a giver wants to attach conditions or keep money from a young adult past the state’s age, a Trust can do that, though it costs more to set up and run. The table sets out the main differences.

Problems with custodial accounts tend to surface years after the account is opened, when the child takes over or applies for college aid. No plan administrator checks how the money is spent, because state law, not a plan document, governs the account. FINRA has even found brokerages letting custodians keep trading after the child came of age. The duty to follow the rules rests with the custodian, and these are the errors that cause most of the trouble: