What Is a Custodial Account? UGMAs, UTMAs and More

If you’re a parent, guardian or otherwise have a child you care about in your life, you might wonder what you can do to help them thrive once they’re on their own in this expensive world. One of the best ways to do that is by giving them a head start by investing money for them while they are young, through a type of account known as a custodial account. Custodial accounts can also be a tool for helping minors learn how to save and invest.

What is a custodial account?

A custodial account is a savings or investment account managed by an adult (the custodian) for a minor until the child reaches the age of majority. That age varies from 18 to 21, depending on the state.

Once a minor with a custodial account reaches the age of majority, they inherit control of the account and the funds, but their spending may also be restricted, depending on the type of custodial account.

Types of custodial accounts

Many custodial accounts are Uniform Gift to Minors Act or Uniform Transfer to Minors Act accounts. These are taxable brokerage accounts.

UGMA accounts allow adults to give minors cash or securities. UTMA accounts are similar, but they also allow transfers of real estate, art and other assets not permitted in a UGMA account.

» Read more about UTMA and UGMA.

There are also many other types of custodial accounts, including retirement accounts and tax-advantaged education accounts like 529 college savings plans and Coverdell education savings accounts.

“I’ve facilitated setting up custodial IRAs and Roth IRAs,” says Rick Nott, a California-based certified financial planner. “You can also set up a custodial 529 account where [a minor] is technically the owner and beneficiary.”

If you're saving for someone with a disability, you may be interested in ABLE accounts.

Custodial account rules

Gift tax rules generally govern contributions to custodial 529 plans and non-education-related custodial accounts. But due to the high lifetime gift tax exclusion, most people avoid the gift tax on these contributions. (You may, however, have to file a gift tax return. Read all the details about the gift tax and the annual and lifetime limits.)

Coverdell ESA contributions have their own rules. If you're a single tax filer with a modified adjusted gross income, or MAGI, below $95,000, or a joint filer with a MAGI below $190,000, you can contribute the full amount. If you have a higher MAGI, the amount you can contribute will be reduced. And you can't contribute to a Coverdell ESA at all if you're a single filer with a MAGI above $110,000, or a joint filer with a MAGI above $220,000.

529 plan balances also must not exceed the expected cost of the child’s education; that number varies by state.

Distributions from custodial 529 plans and ESAs must be used for qualified education expenses, though new flexibility has been introduced in recent years for 529 plans. UTMA and UGMA accounts have looser distribution rules, but they can’t be used as a piggy bank for the adult custodian.

“You can take out money from a UTMA before the minor reaches the age of majority, as long as it’s used for their benefit. So it can’t be used for the custodian’s own personal use,” says Jeff Weber, a certified financial planner who is also based in California.

“Once the minor turns the age of majority, then they have free access to the account. It actually turns into an individual account in their name, and they can withdraw as little or as much as they want at that point in time,” says Weber.

How to open a custodial account

Many online brokers and financial institutions allow customers to apply for a custodial account online.

» Read our picks: The best custodial accounts

“You need the name and information of the child, and more importantly you need a custodian, a person who’s effectively controlling the account until [the child] reaches the age of majority. That has to be an adult, 18 years or older,” says Nott.

Custodial accounts and financial aid

If you’re considering opening a UTMA or UGMA account to help pay for a child’s education, you should know that it may affect their financial aid eligibility.

UTMA and UGMA accounts are considered assets that belong to the minor and thus may negatively impact financial aid eligibility through the Free Application for Federal Student Aid.

Custodial 529 plans and ESAs have more favorable FAFSA treatment, as they’re considered assets belonging to the parent. That means they will only reduce the child’s financial aid eligibility by a maximum of 5.64% of the account balance.