Why Custodial Accounts Are Essential
After understanding the hidden cost of the piggy bank, it is time to open an investment account for your child. Minors cannot legally own assets outright, so parents use custodial accounts to manage money on their behalf.
Custodial Accounts Explained
- Custodian: Usually the parent, who manages the account.
- Beneficiary: The child, who legally owns the assets.
- Irrevocable gift: Once money is contributed it belongs to the child and cannot be clawed back.
- Age of majority: When the child reaches the transfer age (varies by state), full control shifts to them.
UGMA vs. UTMA at a Glance
| Feature | UGMA (Uniform Gifts to Minors Act) | UTMA (Uniform Transfers to Minors Act) |
|---|---|---|
| Assets allowed | Financial assets only (stocks, ETFs, mutual funds, cash, insurance) | Financial assets plus real estate, royalties, fine art, business interests |
| Age of transfer | Typically 18 (state dependent) | 18–21 in most states; some allow extension to 25 |
| Complexity | Simple to open and manage | Slightly more complex but very flexible |
For most parents investing in broadly diversified funds, the UGMA provides all the capability you need. The UTMA shines only when you plan to gift non-traditional assets.
The Kiddie Tax and Why It Matters
Unearned income in a custodial account may trigger the Kiddie Tax.
| Unearned Income (2025) | Tax Treatment |
|---|---|
| $0 – $1,350 | Tax-free |
| $1,351 – $2,700 | Taxed at the child’s rate (usually 10%) |
| $2,701+ | Taxed at the parent’s marginal rate |
If your child’s dividends and gains stay under $2,700 per year, taxes remain minimal. Larger portfolios simply require planning so the tax bite does not surprise you.
Financial Aid Impact
Custodial assets count as the student’s resources on FAFSA, and up to 20% of that balance can be expected to go toward college each year. Parent-owned assets (like a 529 plan) are assessed at 5–6% instead, so families seeking maximum aid may prefer 529s. Still, UGMA/UTMA accounts offer unmatched flexibility for non-tuition goals.
Choose the Right Brokerage
Look for platforms with:
- No or low trading fees
- Fractional shares
- Automatic investing
- Intuitive mobile apps that kids can safely observe
👉 Action Step: See our list of the Best Brokerages for Custodial Accounts to open the right account and start investing today.
Want to teach your child how money grows?
Try the Kids Savings Calculator
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