If you want to start building a savings early on for your child, the perfect vehicle to do that is through a custodial account.
These accounts make it possible for parents, grandparents or other adults to save for a child's future — whether that's helping them cover education costs, build long-term savings or gain a financial head start when they reach adulthood.
What is a custodial account and how does it work?
A custodial account is a savings or investment account that an adult (the custodian) opens and manages on behalf of a minor until the minor reaches a certain age — usually between 18 and 21, depending on the state. These accounts allow adults to transfer assets such as cash, securities, real estate, annuities, insurance policies or other investments to a minor. Once the minor reaches the age of majority, they gain control of the account, though how they can use the funds may depend on the type of custodial account.
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Types of custodial accounts
The most common custodial accounts fall under the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). Both accounts allow adults to transfer assets to a minor, with a custodian managing the account until the child reaches the age of majority. The main difference is what you can put in: UGMA accounts are limited to investing in cash, stocks and bonds, while UTMA accounts also allow property investments such as real estate or artwork.
Another option is a Coverdell ESA (Education Savings Account). Unlike UGMA or UTMA accounts, Coverdell funds are specifically for education expenses — from kindergarten through college. Contributions are capped at $2,000 per year, but the money grows tax-free as long as it's used for qualified school costs.
You may also come across 529 savings plans and ABLE accounts, the latter which stands for Achieving a Better Life Experience. These aren't custodial accounts in the strict sense but can be set up with a custodian. A 529 plan is designed for education, but it allows much higher contributions (limits vary by state) and gives the account owner more control, such as the ability to change the beneficiary. An ABLE account, on the other hand, is designed for people with disabilities, offering tax-free growth and withdrawals when used for qualified disability-related expenses.
Tax implications on custodial accounts
When you put money or assets into a custodial account, there are a few tax rules to keep in mind. First, any income the account earns — like interest, dividends or profits from selling investments — is generally taxable. Some of that income may be tax-free or taxed at a lower rate for the child, but if the earnings are above a certain amount, they can be taxed at the parent's higher rate under what's called the "kiddie tax."
When you give money or assets to a custodial account, it also counts as a gift. The government allows you to give up to a certain amount per year per child — $19,000 in 2025 — without owing any gift tax or affecting your lifetime exemption. If you give more than that, you don't automatically owe taxes right away, but the excess counts against your total lifetime gift and estate tax limit.
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How to open a custodial account
You can open a custodial account at most banks or brokerages. You'll need the following documentation:
- For the child: Name, date of birth and Social Security number
- For the custodian: Name, address, contact information and Social Security number
- To fund the account: Bank account information
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