Key takeaways

• Custodial accounts offer a flexible way to invest for a child's future that goes beyond education savings. 
• Custodial accounts can impact taxes and reduce eligibility for need-based financial aid, so it's important to understand the tradeoffs.
• Once money is contributed to a custodial account, it belongs to the child and can't be taken back or transferred to someone else.

When you want to give a child a financial head start, a custodial account can be a useful option.

The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) are laws that allow adults to save and invest money for a child in a custodial account while they're still a minor. UTMA and UGMA accounts can be appealing because the money can eventually be used for just about anything — from education to buying a first home.

Here's what to know before opening one.

What are UTMA and UGMA accounts?

A UTMA or UGMA account is opened by an adult — often a parent, grandparent, or other family member — for the benefit of a child. The adult acts as the account's custodian, managing the money and investments until the child reaches the age of majority, which typically is between ages 18 and 25, depending on the type of account and specific state law where the minor resides.¹

The two account types are very similar, with one key difference.² UGMA accounts generally hold cash or investments like stocks, bonds, and mutual funds. UTMA accounts can hold these financial assets as well as tangible property such as real estate or artwork.* Once the custodianship terminates, the beneficiary generally gains control of the assets and may use them differently from what the original donor intended.

Any money you contribute is considered an irrevocable gift.³ While there are no contribution limits for custodial accounts, contributing more than the 2026 IRS $19,000 annual gift threshold (or $38,000 for married couples per donor, per recipient) will require a gift tax return.⁴ 

Once in the account, the money legally belongs to the child and must be used for the child’s benefit. A custodian generally can execute transactions and withdraw or transfer assets, but only for the minor’s benefit.

Read more: Custodial Roth IRA: Planning for your child’s future

Potential benefits of a custodial account

Flexibility is one reason many families choose custodial accounts. The money in a UTMA or UGMA account eventually can be used for almost anything — from paying for college to buying a car, starting a business, or even making a down payment on a home.

Other advantages include:

• A wide range of investment options, including stocks, ETFs, mutual funds, and bonds.
• Anyone can contribute on behalf of the child
• No annual contribution limits (but gifts exceeding the IRS threshold may have federal gift tax implications as mentioned above).
• Easy account setup through many brokerage firms.

Could a custodial account affect financial aid?

It's important to understand how a custodial account could come into play if your child plans to attend college and apply for need-based financial aid.

Because the custodial account assets belong to the child, they're generally treated less favorably in the federal financial aid formula than assets owned by a parent, such as a 529 plan. In fact, a custodial account could potentially reduce eligibility for need-based aid by 20% of the asset value — significantly more than a parent-owned 529 plan, which might reduce aid by up to 5.64% of the asset value.⁵ The effect on an actual financial-aid award depends on the applicant’s full financial circumstances, applicable exemptions, and the school’s methodology.

Financial aid rules can change over time, so it's a good idea to review the latest guidance if college funding is one of your savings goals.

Read more: FAFSA changes: What to know about student aid as fall enrollment opens

How custodial accounts are generally taxed

UTMA and UGMA custodial accounts don’t offer the same tax advantages as some other savings options, such as 529 plans or custodial Roth IRA accounts. 

Investment earnings — including interest, dividends, and capital gains — are generally taxed in the child's name under the IRS's "kiddie tax" rules.⁶ Each year, up to $1,350 of a child's unearned income may be tax-free, and the next $1,350 may be taxed at the child's typically lower tax rate.⁷ Any unearned income above those annual thresholds may be taxed at the parent's marginal tax rate.

Read more: Are 529 contributions tax deductible? Federal and state rules

Could a custodial account be right for you?

If your primary goal is saving for education, a 529 plan could offer different tax advantages. But if you'd like to give a child financial support that could be used for college — or whatever opportunities and expenses life brings — a UTMA or UGMA account may offer more flexibility.

Ultimately, your choice comes down to what financial goal you’re hoping  to help your child achieve.

Read more: Is a 529 plan worth it? Pros, cons, and when it makes sense