A Parent’s Guide to Custodial Accounts: Benefits, Drawbacks, and Alternatives

If you’re thinking about setting up an investment account for your child or grandchild, a custodial account might be a great option. It’s a simple way to gift assets while maintaining control until your child becomes an adult. Plus, it offers flexibility that many families appreciate.

What Is a Custodial Account?

A custodial account is a financial account that an adult (the custodian) manages on behalf of a minor. These accounts are typically created under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).

Here’s how it works:

• The assets legally belong to the child, but the custodian manages them until the child reaches the age of majority (usually 18 or 21, depending on your state).
• Once the child comes of age, the account is fully theirs—no strings attached.

Custodial accounts can hold a variety of assets, including:

• Cash
• Stocks and bonds
• Mutual funds
• (For UTMA accounts) even real estate or other property

How Do Custodial Accounts Compare to Trump Accounts?

Starting in 2026, the One Big Beautiful Bill will introduce Trump Accounts, which share some similarities with custodial accounts but also have key differences:

• Investment Options: Custodial accounts allow a wide range of assets, while Trump Accounts will likely be limited to index-based ETFs and mutual funds.
• Contribution Rules: Custodial accounts have no contribution limits, while Trump Accounts will have annual caps.
• Government Bonus: Children born between Jan. 1, 2025, and Dec. 31, 2028, may qualify for a $1,000 government-funded deposit in a Trump Account.

Pros and Cons of Custodial Accounts

Advantages

• Flexibility: No income restrictions, no contribution limits, and funds can be used for any purpose—college, a first car, or even a down payment on a home.
• Tax Benefits: A child’s unearned income up to \$2,700 (for 2025) is taxed at lower rates.

Drawbacks

• Limited Tax Advantages: Unlike 529 plans or ESAs, custodial accounts don’t offer tax-free growth for education expenses.
• Financial Aid Impact: Assets in a custodial account can reduce eligibility for need-based aid.
• Loss of Control: Once your child reaches the age of majority, the money is theirs to spend however they choose.

Should You Open One?

Custodial accounts can be a powerful tool for building your child’s financial future and teaching money management. But they’re not the only option. Depending on your goals, a 529 plan, ESA, or even a trust might be a better fit.

Before you decide, consider:

• Your long-term goals
• Tax implications
• College planning needs

Bottom line: A custodial account offers flexibility and simplicity, but make sure it aligns with your family’s financial strategy.

Have questions or need guidance? We’re here to help you choose the best path for your family’s future.