How to Open a Custodial Account for a Minor

Custodial accounts allow you to manage assets on behalf of a minor until they reach adulthood so that you can provide a structured approach to financial planning for their future. You may want to save for their education or a future purchase, or perhaps, you simply teach them about the importance of saving and investing. No matter the reason, opening a custodial account for a minor can be a great way to give your child or grandchild a financial head start.

If you need help saving money for a financial milestone, an advisor can work with you to reach that goal.

What Is a Custodial Account?

A custodial account is a financial account established by an adult on behalf of a minor. These accounts are governed by the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA) , which vary slightly in terms of the types of assets they can hold and the flexibility they offer.

The adult, often a parent or guardian, acts as the custodian, managing the account until the minor reaches the age of majority. This is usually 18 or 21, depending on the state.

There are no specific contribution limits for custodial accounts, meaning you can contribute as much as you wish to help secure the minor's financial future. However, contributions are considered irrevocable gifts, meaning once assets are transferred into the account, they legally belong to the minor and cannot be reclaimed by the custodian.

Types of Custodial Accounts

• UTMA accounts : UTMA accounts allow for a wider range of assets to be held, including real estate , intellectual property and works of art . This flexibility makes UTMA accounts ideal for those who wish to invest in non-traditional assets on behalf of a minor.
• UGMA accounts : UGMA accounts are limited to more traditional financial assets like stocks , bonds and mutual funds . These accounts are more straightforward and are often used for saving and investing in financial markets.

How to Open a Custodial Account

Opening a custodial account is a simple process consisting of the following steps:

1. Choose a financial institution : Research and select a bank, credit union or brokerage firm that offers custodial accounts. Some of the custodial account options include Vanguard , Acorns and Ally Bank . Be sure to consider factors like fees, account options and the range of investment opportunities available.
2. Select the type of custodial account : Decide whether you want to open a UTMA or UGMA account, based on the type of assets you plan to contribute and the flexibility you desire.
3. Gather the necessary information : You will need basic information about both the custodian and the minor, including Social Security numbers, birth dates and contact information. Some institutions may also require identification documents.
4. Complete the application : Fill out the account application provided by the financial institution, ensuring all information is accurate. Specify the type of custodial account and the initial deposit amount.
5. Fund the account : Once the account is open, you can transfer money or assets into the account. This can be done through a one-time deposit, recurring transfers or the transfer of existing assets into the account.
6. Manage the account : As the custodian, you will be responsible for account management until the minor reaches the age of majority. This includes making investment decisions, tracking contributions and ensuring the account is used for the minor's benefit.

Frequently Asked Questions About Custodial Accounts

Can the Minor Access Funds Before They Reach the Age of Majority?

No, the minor cannot access the funds in a custodial account until the age of majority is reached–typically 18 or 21, depending on the state. However, the custodian can use the funds for the minor's benefit, such as paying for education or other significant expenses.

Are There Tax Implications for Custodial Accounts?

Yes, custodial accounts have specific tax implications. While the account is in the minor's name, the income generated by the assets is taxable. The first $1,250 of unearned income is tax-free, the next $1,250 is taxed at the child's rate, and any amount above $2,500 is taxed at the parent's tax rate.

You can consult with a tax professional to learn how the specific tax obligations associated with custodial accounts can affect your financial situation.

Can a Custodial Account Affect Financial Aid Eligibility?

Yes, custodial accounts are considered the minor's assets, which can impact their eligibility for financial aid. When applying for college financial aid, custodial account balances are factored into the Expected Family Contribution (EFC) calculation, which can reduce the amount of need-based aid the student qualifies for.

Bottom Line

Opening a custodial account for a minor is a way for you to manage and grow assets on their behalf, providing them with a financial foundation as they enter adulthood. Whether you are saving for education, a first car or future investments, understanding how to open a custodial account and the responsibilities involved can help you secure your child's financial future and provide an introduction to saving and investing early in life.

Financial Planning Tips

• If you want to create a financial plan, an advisor can work with you to determine which strategies are a good fit for your needs and goals. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
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