A custodian account is a bank or investment account opened in a child's name but controlled by an adult until the child reaches the age of majority

The adult—usually a parent, grandparent, or guardian—manages the money, makes deposits and withdrawals, and decides how to invest it. The child owns the account and the money in it, but cannot access or control it until they turn 18 or 21, depending on your state and the type of account. Once they reach that age, the account becomes theirs to manage completely, and the custodian's legal authority ends.

Custodian accounts exist because minors cannot legally sign contracts or hold certain financial accounts on their own. A custodian account lets you set money aside for a child—for education, emergencies, or their future—while keeping it in their name for tax purposes. The account is separate from your own finances, so it is protected if you face creditors or bankruptcy.

Key Takeaways

  • A custodian account is owned by the child but controlled by the adult custodian until the child reaches age 18 or 21.
  • The two main types are UTMA (Uniform Transfers to Minors Act) accounts and UGMA (Uniform Gifts to Minors Act) accounts, with UTMA being more flexible and available in all 50 states.
  • Money in a custodian account is taxed at the child's rate, which is usually lower than the parent's rate, but unearned income above a certain threshold is taxed at the parent's rate.
  • Once the child reaches the age of majority, the custodian must transfer full control of the account to them, and cannot take the money back.
  • Custodian accounts can affect a child's financial aid may be able to access for college because they are counted as the child's asset, not the parent's.

UTMA and UGMA accounts: the two main types

The two legal frameworks for custodian accounts are the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA). UTMA is newer and more flexible; it allows you to transfer real estate, patents, and other property types in addition to cash and securities. UGMA is older and limited to cash, securities, and insurance policies. All 50 states allow UTMA accounts. A few states still use UGMA only or allow both, but UTMA is the standard.

The age of majority—when the child takes control—varies by state. Most states set it at 18, but some allow you to delay transfer until 21 or 25 if you choose that option when opening the account. Check your state's law before opening, because you cannot change the age of majority after the account is created. The custodian has no say in how the child spends the money once they take control; the money is theirs to use as they wish.

How taxes work in a custodian account

Money in a custodian account is taxed in the child's name, not the parent's. This is one reason parents open these accounts: children typically have lower tax rates than adults. If the child has no other income, the first portion of unearned income (interest, dividends, capital gains) is tax-free each year. The exact threshold changes annually; for 2024, a child can earn up to a certain amount in unearned income before owing federal tax.

However, there is a catch called the kiddie tax. If the child's unearned income exceeds the annual threshold, the excess is taxed at the parent's rate, not the child's rate. This rule applies until the child turns 24 (or 27 if they are a full-time student). The goal is to prevent parents from shifting large amounts of income to children to avoid taxes. You will need to file a tax return for the child if they have unearned income above the threshold, even if they have no earned income.

Impact on college financial aid

Money in a custodian account counts as the child's asset when calculating financial aid, not the parent's asset. This matters because the financial aid formula expects the child to contribute a larger percentage of their assets toward college costs than the parent does. A custodian account with $20,000 in it will reduce financial aid may be able to access more than $20,000 in a parent's savings account would.

If you are planning to pay for college and want to maximize financial aid, a custodian account may not be the best choice. A 529 college savings plan, which is owned and controlled by the parent, is treated more favorably in the financial aid calculation. However, if you do not expect to may have access to for financial aid, or if the account is for a purpose other than college, a custodian account is a straightforward option.

What happens when the child reaches the age of majority

When the child turns 18, 21, or 25 (depending on your state and the account terms), the custodian must transfer full control of the account to them. This is a legal requirement, not optional. The custodian cannot keep the money, cannot dictate how it is spent, and cannot refuse to hand it over. The child can then withdraw the entire balance, close the account, or leave it open and manage it themselves.

This is a significant consideration if you are opening an account for a young child. You are making a binding commitment to give them that money when they reach the age set by law. If you want to retain control over how money is used—for example, to ensure it goes toward education or a house down payment—a custodian account is not the right tool. A trust, which requires a lawyer to set up, gives you more control over when and how money is distributed.

How to open a custodian account

Most banks and investment firms offer custodian accounts. You can open one at your current bank, at a brokerage firm like Fidelity or Vanguard, or at an online bank. You will need the child's Social Security number, proof of your identity, and proof of your relationship to the child (birth certificate or adoption papers). The bank will ask whether you want a UTMA or UGMA account and at what age the child should take control.

Once the account is open, you can deposit money and manage it as you would any other account. You can set up automatic transfers, invest in stocks or bonds if it is a brokerage account, or keep it in a savings account earning interest. You can add money at any time, and there are no contribution limits for custodian accounts (unlike 529 plans or Roth IRAs). The account is in the child's name, so you will receive tax documents in their name each year.

Custodian accounts versus other ways to save for a child

A custodian account is not the only way to set money aside for a child. A 529 college savings plan is tax-advantaged and owned by the parent, so it does not reduce financial aid as much. A Roth IRA for a child with earned income offers tax-free growth and withdrawal flexibility. A trust gives you more control over when and how money is distributed after the child reaches adulthood. A regular savings account in your own name is simpler but offers no tax advantage and is considered your asset, not the child's.

Choose a custodian account if you want a simple, low-cost way to save for a child, do not expect to may have access to for financial aid, and are comfortable giving the child full control at the age of majority. Choose a 529 plan if college savings is your main goal. Choose a trust if you want to retain control over distributions or have complex family circumstances. Most families use a combination: a custodian account for general savings and a 529 for education-specific funds.

Frequently Asked Questions

Can I take money out of a custodian account for my own use?

No. The money belongs to the child, not to you. Taking it for personal use is considered a breach of your fiduciary duty and can have legal consequences. The account must be used for the child's benefit—education, medical care, living expenses, and similar costs. If you need access to your own money, keep it in a separate account in your name.

What happens if the custodian dies before the child reaches the age of majority?

The account does not disappear. Most custodian accounts allow you to name a successor custodian when you open the account. If you do not name one, the account may be frozen until a court appoints a new custodian, or it may pass to the child's legal guardian. Name a successor custodian in your account documents to avoid delays and court involvement.

Can I change my mind and close the account?

You can close the account, but the money still belongs to the child. You cannot keep it. If you close the account, you must transfer the balance to another custodian account in the child's name or to the child themselves if they have reached the age of majority. You cannot move the money back into your own account.

Does a custodian account affect the child's credit score?

No. A custodian account is a savings or investment account, not a credit account. It does not appear on the child's credit report and does not build credit history. If you want to help a child build credit, you would need to add them as an authorized user on a credit card or open a credit-builder loan in their name.

Can I open a custodian account for a grandchild or niece?

Yes. You do not have to be the parent to be a custodian. Grandparents, aunts, uncles, and other relatives can open custodian accounts. You will need to provide proof of your relationship to the child and your identity. The same rules apply: you control the account until the child reaches the age of majority, then they take full control.