Yes, grandparents can open a savings account for a grandchild, but the account type and your role depend on the child's age and whether parents consent

Grandparents have three main paths: open a custodial account in the child's name with yourself as custodian (works for minors), open a regular savings account in your own name and gift money to it later, or add yourself as an authorized user on an account the parents already control. The first option—a custodial account—is the most common because it lets the money belong legally to the grandchild from the start, which matters for taxes and for the child's future control of the account.

The catch is that custodial accounts come with rules. The money belongs to the child, not to you, even though you manage it until they reach the age of majority (18 or 21, depending on your state). You cannot take the money back or use it for yourself. When the child turns 18 or 21, the account transfers to them completely, and they can spend it however they want.

Banks do not require parental permission to open a custodial account, but telling the parents first prevents confusion and conflict later. If you open an account without telling them, they may not know where the money is or how to access it in an emergency.

Key Takeaways

  • A custodial account (also called an UGMA or UTMA account) lets you open a savings account in your grandchild's name and manage it until they reach 18 or 21.
  • You will need the child's Social Security number, birth date, and address to open a custodial account at most banks.
  • The money in a custodial account belongs to the grandchild and cannot be taken back or used for your own expenses, even in an emergency.
  • When the child turns 18 or 21 (depending on your state), the account becomes theirs to control, and you no longer have authority over it.
  • Custodial accounts may affect the child's financial aid for college, so discuss this with the parents before opening one.

What you need to open a custodial account

Most banks require the same documents to open a custodial account as they do for a regular account, plus proof that you are the custodian. Bring a government-issued photo ID (driver's license or passport), the child's Social Security number, and the child's date of birth and address. Some banks also ask for the child's birth certificate.

You will list yourself as the custodian and the child as the account owner. The bank will ask you to choose whether to open the account under your state's Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Both work the same way for savings accounts—the difference matters more for investments—so either is fine. Your state law determines which one is available.

Some banks let you open a custodial account online, but many require you to visit a branch in person. Call ahead to confirm what the bank needs and whether you can complete the process remotely.

How taxes work on a custodial savings account

Interest earned in a custodial account is taxed as income to the child, not to you. This is usually a tax advantage because children typically have little or no other income and may owe no federal tax on the interest. For 2024, a child can earn up to $1,425 in unearned income (like interest) before owing federal tax, though this amount changes yearly.

You will receive a 1099-INT form from the bank showing the interest earned, and the child (or their parents, if the child is very young) will report it on a tax return. If the account earns very little interest, you may not need to file a return at all. Check the IRS website or a tax professional for the current threshold.

The tax advantage shrinks if you put a large amount of money in the account, because the interest becomes substantial. If you are planning to deposit thousands of dollars, discuss the tax impact with a tax professional or the parents first.

Custodial accounts and college financial aid

Money in a custodial account counts as the child's asset when they or their parents fill out the Free Application for Federal Student Aid (FAFSA). This can reduce the amount of need-based financial aid they receive, because colleges assume students will use their own savings before taking out loans or receiving grants.

The impact varies depending on how much is in the account and the family's total assets. A small custodial account may have little effect, but a large one could reduce aid by a meaningful amount. If college is several years away and you are thinking about opening a custodial account, talk to the parents about whether this trade-off makes sense for their family.

Some grandparents choose to wait until after the child has submitted their final FAFSA (usually in senior year of high school) before depositing large amounts. Others open the account in the grandparent's own name instead, which does not affect financial aid at all.

What happens when the child turns 18 or 21

The age at which the child takes control of the account depends on your state and the type of account you opened. Most states use age 18 for UGMA accounts and age 21 for UTMA accounts, but some allow you to choose. When that birthday arrives, the account automatically transfers to the child's full control, and you no longer have any authority over it.

You cannot extend your control past that age, and you cannot require the child to use the money for college, a car, or anything else. If you want to maintain some control over how the money is used, a custodial account is not the right tool—you would need to set up a trust with a lawyer, which is more expensive but gives you more say.

Some grandparents talk to the child (or the parents, if the child is young) about the plan for the money before the transfer date arrives. This can help the child understand the responsibility and make a thoughtful decision about how to use it.

Alternatives to a custodial account

If you do not want to open an account in the child's name, you can open a regular savings account in your own name and simply give the money to the grandchild or their parents later. This keeps the money under your control and does not affect the child's financial aid. The downside is that the money is legally yours, so it could be at risk if you face a lawsuit or creditor claim, and it may complicate your estate if you pass away.

You can also ask the parents to add you as an authorized user on an account they already control. This lets you deposit money and check the balance, but the parents retain full control. This works well if you want to contribute regularly but do not want the legal responsibility of being the custodian.

A third option is a 529 college savings plan, which is specifically designed for education expenses and has different tax and financial aid rules than a custodial account. If the money is meant for college, a 529 may be more tax-efficient. Talk to a tax professional or the parents about whether this makes sense for your situation.

How to open the account in practice

Start by asking the parents whether they have a preference for which bank or credit union to use. Many families already have accounts at a particular institution, and opening the custodial account there makes it easier to transfer money and keep track of it.

Call the bank or visit their website to confirm they offer custodial accounts and what documents you will need. Some smaller banks or credit unions do not offer them, so it is worth checking before you make a trip. Ask whether you can open the account online or whether you need to come in person.

Bring your ID, the child's Social Security number, and the child's birth date and address. The bank will walk you through the rest. You will choose whether to open it as UGMA or UTMA (the bank will explain the difference for your state), set up online access if you want it, and decide on the initial deposit. You can start with any amount—even $1—and add to it later.

Frequently Asked Questions

Do I need the parents' permission to open a custodial account?

No, banks do not require parental consent. However, telling the parents first is a good idea so they know the account exists and where the money is. If you open an account without telling them and something happens to you, they may not know how to access it for the child's benefit.

Can I take money out of the custodial account if I need it?

No. The money belongs to the child, not to you. Taking money out for your own use is illegal and can result in tax penalties and legal consequences. You can only withdraw money for expenses that directly benefit the child, such as education, medical care, or living expenses.

What happens if I die before the child turns 18?

The account will be part of your estate. If you have a will, you can name someone (usually the parents) to manage the account on the child's behalf until they reach the age of majority. If you do not have a will, your state's laws will determine who manages it. Talk to a lawyer if you want to make sure the account is handled the way you intend.

Can I open a custodial account at an online bank?

Some online banks offer custodial accounts, but not all. Check the bank's website or call to confirm. Online banks often have lower fees and higher interest rates than traditional banks, so it is worth looking into if you want to maximize the growth of the money.

What if the child's parents get divorced?

The custodial account belongs to the child and is not part of the parents' divorce settlement. Both parents have equal rights to the money unless a court order says otherwise. If you are concerned about how the account will be handled, talk to the parents or a lawyer about putting the arrangement in writing.