The Best Custodial Accounts for April 2024 (2024)

Why You Should Trust Us

Investopedia collected several key data points from several companies that offer custodial accounts, to evaluate the most essential factors for parents and guardians looking to open a custodial account. We used this data to review each custodial account for fees, minimum opening deposit, and other features to provide an unbiased, comprehensive review to ensure our readers make the right decision on the custodial account of their choice.

Frequently Asked Questions

• What is a Custodial Account?

  A custodial account is a unique financial account designed for minors to build and accumulate wealth under the responsibility of an adult. Generally, the account is opened by a parent for their child. However, grandparents, other family members, and friends can also open a custodial account for a minor.

  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.

• What’s the Difference Between UTMA vs. UGMA Accounts?

  UTMA and UGMA accounts are reserved for adults to transfer assets to minors. Deciding which account is best depends on the type of asset the adult wishes to transfer. UGMA accounts can only be utilized for simple assets such as cash, stocks, bonds, and mutual funds. However, UTMA accounts are better suited for more complex assets. In addition to being able to hold stocks, bonds, and mutual funds, UTMA accounts can also hold real property, such as real estate and collectibles.

  Parents and guardians should be mindful of state laws and how the asset transfer will impact the child's financial future when they reach the age of majority. Seeking advice from a financial advisor may be beneficial to understand tax advantages and obligations.

• How Does a Custodial Account Work?

  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.

  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.

• When Can You Withdraw Money From a Custodial Account?

  Withdrawals can be made from a custodial account at any time. However, you can only make a withdrawal if it is in the best interest of your child. Meaning the withdrawal must be used to make purchases that directly benefit the minor. It's important to note that parents and guardians cannot make a withdrawal from a custodial account to cover obligatory expenses they are expected to provide for the child.

  Withdrawals from a custodial account cannot be used for living expenses, food, or clothes; those expenses fall onto the parent or guardian's responsibility and cannot be considered a benefit to the child. A good example of how money in custodial accounts can be used is buying a popular electronic device or sports equipment for the child's choice of sport. Remember, once money is deposited into a custodial account, the child owns money. Once the child reaches the age of majority and takes ownership of the account, they can spend that money how they see fit.

• Do Custodial Accounts Get Taxed?

  Yes, custodial accounts do get taxed. However, a benefit of the UGMA and UTMA custodial accounts is that when you invest money on a child’s behalf, the income gets taxed at the child's tax rate rather than at the custodian's tax rate. It is also noteworthy that, for the 2023 tax year, unearned income over $2,500 will generally be taxed at the parent's marginal rate.

• Are Custodial Accounts FDIC insured?

  The extension of FDIC insurance to a custodial account depends on how the account is utilized. FDIC insurance would extend to a custodial account if it's used as a standard checking or savings account. If the custodial account can actively invest in stocks or bonds, then FDIC insurance would not apply. In this case, Securities Investor Protection Corporation (SIPC) would be the applicable insurance to keep assets in the account safe. SIPC does not, however, protect from losses while actively investing.

• Is a Custodial Account a Good Idea?

  A custodial account can be a great way to save up money for your child’s future. A custodial account provides a lot of flexibility for how you want to invest and use the funds as opposed to a 529 account which has specific rules around how you can spend the money. However, there are some things to consider before deciding if a custodial account is right for you.

  If you think your child will need to apply for financial aid, the money in a custodial account is weighed heavily against their financial aid eligibility as assets in a custodial account will count as your child’s assets. This means if you have a lot of money saved up for your child in a custodial account, they could miss out on thousands of dollars in financial aid. Also consider that as soon as your child turns of age (often 18), they take full control of the account. For some parents, there may be a concern that their child is not ready to take on this kind of financial responsibility. If this is the case, a custodial account might not be the right fit.

• How to Open a Custodial Account

  The process of opening a custodial account for your child or close family member who is still a minor is similar to if you were opening an account for yourself. Generally, the custodial account will need basic information from you and the person you are opening the account for, such as name, date of birth, and Social Security number. However, you may need to update financial information, such as an external bank account, to fund the custodial account.