What is a custodial account? Everything parents need to know

As parents, we all want what’s best for our kids. And the simple reality is that a child’s financial education has a huge impact on their future success and security in life. One smart way to start is by opening a custodial account in your child’s name. This guide explains how custodial accounts work, the pros and cons, and what happens when your child turns 18.

What is a custodial account?

A custodial account is a financial account created by an adult for a minor. The adult (known as the “custodian”) manages the account until the child reaches the age of majority (usually 18 or 21, depending on the state).

The money or assets in the account legally belong to the child. That means once they’re old enough, they’ll get full control. Until then, you can manage the account, invest funds, and use the money for expenses that benefit your child.

How custodial accounts work

So, how does a custodial account actually work in day-to-day life? Here’s a quick breakdown of what to expect, from who owns the money to how (and when) it can be used.

Ownership

The adult listed on the account (usually a parent or guardian) is in charge of managing it. But from day one, the money in the account belongs to the child. You're just handling it until they’re old enough to take over.

Contributions

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Anyone can chip in, including parents, grandparents, and even generous family friends. But once the money goes in, it’s considered a gift that can’t be taken back. That means all contributions are permanent.

Withdrawals

You can use the money while your child is still a minor, but only for things that benefit them, like school supplies, extracurriculars, camp, or medical expenses. 

Taxes

Any earnings (like interest, dividends, or capital gains) are taxed under your child’s Social Security number. If those earnings are high enough, the IRS may apply what's called the “kiddie tax.” If you're contributing a lot or investing aggressively, it’s worth checking in with a tax pro.

Pros and cons of custodial accounts for parents

Like any financial tool, custodial accounts come with both benefits and trade-offs. Before you open one, it’s helpful to understand how they work in the long run, especially once your child takes control. Here's a look at the key pros and cons.

Pros

• Easy to open. Custodial accounts are available through most banks and brokerages.

• Flexible use. The funds can be used for any expense that benefits the child.

• Financial education. They help kids learn about saving, investing, and ownership.

• Gift-friendly. Great for grandparents or others looking to contribute to a child’s future.

Cons

• Irrevocable gifts. Once the money’s in, it belongs to the child.

• It can impact financial aid. Since the money legally belongs to the child, it can reduce college financial aid eligibility.

• No restrictions. Once your child reaches the age of majority, they can use the funds however they want, even if it’s not what you had in mind.

How to open a custodial account

To open a custodial account, parents or legal guardians can take the following steps.

1. Decide between an UGMA and UTMA account

When you open a custodial account, you usually have two options::

• UGMA (Uniform Gifts to Minors Act). These accounts can hold financial assets like cash, stocks, or bonds. In most states, the child gets access to the funds at age 18.

• UTMA (Uniform Transfers to Minors Act). These are a bit more flexible. In addition to holding traditional financial assets, UTMA accounts can include things like real estate, vehicles, or even artwork. These funds often transfer to the child at age 21, depending on your state’s laws.

Most families don’t need to overthink the choice. Your bank or brokerage will usually offer one type based on what’s allowed in your state. And both accounts work the same way: The adult manages the money until the child comes of age.

2. Pick a financial institution

Some parents might prefer to use their own existing bank for simplicity, while others might want to seek out another option that might be ideal for their kids. Here are some factors to consider:

• Physical access. Do you want your child to have access to physical bank branches?

• Account options. Most banks and credit unions offer custodial accounts. Check with any banks you’re considering to learn more about their account options.

• Fees. Watch for monthly service fees, as well as standard overdraft fees, ATM fees, etc.

• Kid-friendly features. Does the financial institution have features that are designed specifically for children or teens? Are there financial education resources? Is the banking app accessible for your child? 

3. Gather the required information and documents

Now it’s time to prepare the necessary information and documents to actually open an account. In most cases, this will include:

• Your name and your child’s name

• Your full address (and potentially proof of address, like a recent utility bill)

• Your date of birth and your child’s date of birth

• Your Social Security number (SSN) and your child’s SSN or birth certificate

• Your valid government-issued photo ID (driver’s license, passport, etc.)

Some financial institutions may have additional requirements, but the items on the list above will almost always be required.

4. Open and fund the account

Opening an account can typically be done online, or in person, if you choose to use a traditional bank or credit union.

During the opening process, you will typically be required to make an opening deposit to fund the account. This will generally be a small amount, but it may be required at the time of account opening.

You should also keep an eye on minimum balance requirements. Some banks require that accounts maintain a minimum balance—$100, for example—at all times.

What happens when my child reaches the age of majority (between 18 and 25)?

Once your child reaches the age of majority (usually between 18 to 25, depending on your state), the custodial account legally becomes theirs.

At that point, they’ll gain full control. That means they can decide how to use the money, whether to spend it, invest it, or save for future goals. Parents no longer have any say in how the funds are used.

This transition is a great time to have a conversation with your child about budgeting, saving, and long-term planning.

A custodial account is a great first step toward financial literacy.

Opening a custodial account gives your child a head start on building smart money habits. They’ll see how savings can grow and what it means to manage their money, all with your guidance.

When your child is ready for a more hands-on experience, you might consider a kid-friendly money app like Greenlight.

Greenlight, the #1 family finance and safety app, is a debit card and money app for kids and teens. When you sign up, both you and your child get your own account — all managed through the Greenlight app. As a parent, you can fund the account, set purchasing restrictions and other parental controls, monitor activity, and much more. And your child can learn how to earn, save, spend, and even invest money — all in one place.

FAQs

Can I take money out of a custodial account for my own use if I’m the custodian?

No, all money must be used to benefit the child, not for the parent’s personal use.

What’s the difference between a custodial account and a 529 plan?

Custodial accounts can be used for any expense that benefits the child, while 529 plans are limited to education-related expenses but may offer more favorable tax advantages.

Are there limits to how much I can contribute to a custodial account?

There’s no formal limit, but contributions over the annual gift tax exclusion ($18,000 per child in 2024) may require filing a gift tax return.

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