Key takeaways
- In a UTMA or UGMA custodial account, the money belongs to the child from the moment the gift is made, and the custodian only manages it on their behalf.
- Deposits are irrevocable, and the custodian must transfer the assets when the child reaches the age of majority set by state law.
- A child’s unearned income above $2,700 is taxed at the parent’s rate under the kiddie tax rules that apply for 2025 and 2026.
- A 529 plan keeps control with the adult and limits spending to education, while a custodial account offers flexibility but no take-backs.
- Because a custodial account sits in the child’s name, ask how it will be treated on financial aid applications before you fund a large amount.
Opening a custodial account is one of the simplest ways to put money in a child’s name, and one of the easiest to underestimate. The account is straightforward to set up, but the money legally belongs to your child from the day you deposit it, and the rules around control, taxes and financial aid are less flexible than many parents expect. This checklist covers what a UTMA or UGMA account really is, what the kiddie tax means for the earnings, and how the account compares with a 529 plan, so you can weigh the trade-offs before you sign anything.
What a Custodial Account Is and Who Actually Owns the Money
A custodial account lets you transfer money, securities and other assets to a minor without setting up a formal trust. Two model laws make this possible: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). Every state has adopted some version of one or the other, and the details vary from state to state.
Work through these points before you open anything:
- Confirm who owns the money. When the account is established, the child, called the beneficiary, is treated as owning the assets from the moment the gift is made. You, as the custodian, manage and invest it on the child’s behalf.
- Check which law your state uses. UGMA and UTMA accounts differ in the assets they can hold, and each state sets its own requirements, so confirm the rules where you live.
- Understand what a deposit means. Putting assets into the account is an irrevocable transfer from you to the child. There is no taking it back.
- Note that the account is not limited to parents. Other family members or legal guardians can open or contribute to this kind of account, though every deposit is a gift to the beneficiary.
Be aware: Money you place in a custodial account is an irrevocable gift. Once your child reaches the age of majority, the custodian is required to transfer the assets, and the young adult can use them however they like.
Check the Control Question: When Your Child Takes Over
This is the item most parents skip, and the one that matters most.
- Look up your state’s age of majority. The custodianship generally ends when the beneficiary reaches the age of majority, an alternative termination age set in your state’s statute, or if the beneficiary dies.
- Ask whether the date can be moved. Some states let the donor or the custodian extend the custodianship to a higher specified age, and the beneficiary must be notified of the right to demand the assets at a certain age.
- Plan for the handover. At the age of majority, the custodian must hand the assets over to the young adult they belong to. After that, the account belongs to them to spend, save or invest as they choose.
- Ask the firm how the transfer works. Regulators at FINRA have found that some firms did not track when beneficiaries reached the age of majority, which left custodians running accounts that were no longer theirs to run. Ask how the firm flags the date and what steps follow.
Check the Tax Rules: Kiddie Tax and Unearned Income
Custodial account earnings count as the child’s unearned income, which is income from sources other than work. It includes interest, dividends, capital gains, rents and royalties. Wages from a part-time job are earned income and follow different rules.
- Understand the kiddie tax. Congress created it as part of the Tax Reform Act of 1986 to stop parents from shifting assets into children’s names to pay a lower rate. When it applies, unearned income above a threshold is taxed at the parent’s rate rather than the child’s.
- Know the thresholds for 2025 and 2026. The first $1,350 of a child’s unearned income is tax free. The next $1,350 is taxed at the child’s rate. Anything above $2,700 is taxed at the parent’s rate.
- Expect Form 8615 if the threshold is passed. A child with more than $2,700 of unearned income who is required to file a return uses this form to figure the tax. It applies to children under 18, to 18-year-olds whose earned income is not more than half of their support, and to full-time students aged 19 to 23 who meet the same support condition. The child must not file a joint return, and at least one parent must have been living at the end of the tax year.
- Check the Form 8814 election. If your child’s only income is interest and dividends, including capital gain distributions, totaling less than $13,500, you may be able to report that income on your own return instead of filing a separate return for your child.
- Ask about the net investment income tax. A child who files Form 8615 may also owe this tax, which is 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount.
- Remember what support includes. For the age rules above, support counts food, shelter, clothing, medical care and education, so how much you support an 18- to 23-year-old can determine whether their investment income is taxed at the parent’s rate.
Check the Financial Aid Impact Before You Fund It
A custodial account sits in your child’s name, and aid applications treat assets differently depending on whose name they are in. The exact counting formulas change over time and vary by program, so treat this as a check rather than a fixed rule.
- Ask how the account will be treated. Before you move a large sum, talk to the financial aid office at schools your child might attend, or review the Department of Education’s guidance on how assets are reported on aid applications.
- Compare the treatment of a 529 plan. How a 529 plan you own is reported is a different question from how an account in your child’s name is reported, so verify both if you are weighing the two.
- Think about timing. What is in the account when applications are filed is what gets counted. Spreading contributions across years is one option families consider.
Check How the Money Can Be Used, and What It Can’t Be Used For
A custodial account is flexible on purpose, which cuts both ways.
- Use it for the child’s benefit. There are no restrictions on what the money can pay for, as long as the spending benefits the beneficiary. School costs, activities, equipment or a car for the child all fit within that standard.
- Keep the custodian’s hands off it. The custodian manages and invests the assets for the beneficiary’s benefit, not for their own. Spending the money on yourself is not what the account is for.
- Expect no limits after the handover. Once the child reaches the age of majority, there are no restrictions at all on how the money is used, whether or not it goes toward college.
- Keep records of major withdrawals. If you spend from the account while your child is a minor, keep receipts and a simple log showing the money went to the child’s benefit.
Custodial Account vs. 529 Plan: The Key Differences
A 529 plan is a state-sponsored education savings account, and it is the option most families compare against a custodial account. Both can hold money for a child, but they trade control and flexibility in opposite directions.
| Feature | Custodial account (UTMA/UGMA) | 529 plan |
|---|---|---|
| Who owns the money | The child, from the time of the gift | The adult who opens the account |
| Who controls it | Custodian manages for the child’s benefit until the age of majority | The account owner stays in control |
| What it can pay for | Anything that benefits the child, and anything at all once the child is an adult | Qualified education expenses, with limitations |
| Tax treatment of earnings | Taxed to the child, with kiddie tax rules above $2,700 | Earnings grow tax deferred; qualified withdrawals are tax free |
| Changing the beneficiary | Not possible; the assets already belong to the child | Assets can be moved to another family member’s plan, subject to IRS limitations |
A 529 plan also has escape hatches a custodial account lacks. Unused funds can help repay student loans up to the IRS limit per borrower, you may be able to roll unused funds into the beneficiary’s Roth IRA subject to IRS limitations, and you can transfer assets to another family member’s plan. Contributions are subject to limits, and some states add tax benefits of their own. For a full walkthrough, see A First-Timer’s Guide to 529 College Savings Plans.
Newer options also exist. IRS Publication 501 describes a new type of individual retirement account for certain children born after 2024 and before 2029, including a $1,000 pilot program contribution for children who meet the requirements. Because the rules are new, read the IRS guidance directly before relying on them.
Questions to Ask Before You Sign the Account Agreement
- What is the age of majority in my state, and can the custodianship be extended to a higher age?
- Which assets and investments can the account hold under UGMA or UTMA rules?
- What fees will the account charge each year?
- Where will cash inside the account sit? If you plan to keep part of the money in savings rather than investments, High-Yield Savings vs. Regular Savings Accounts: What’s the Difference? explains what that choice means for growth.
- How does the firm handle the transfer at the age of majority, and who notifies whom?
- How will dividends and capital gains be reported at tax time, and who prepares Form 8615 if it is needed?
- Who else will contribute, and is every deposit treated as a gift to my child?
- Could this account affect financial aid, and would a 529 plan fit the goal better?
- Getting Started With an Allowance for Kids: a way to teach money habits while the amounts are still small.
- How to Automate Your Savings (and Why It Works): set up steady contributions to a child’s account without relying on memory.
- How Big Should Your Emergency Fund Be?: worth checking before you commit money to a child’s account, since your own buffer comes first.
Common questions
Q: What happens to the money when my child reaches the age of majority?
A: The custodianship ends, and the custodian must hand the assets over to your child. From then on, the young adult can spend, save or invest the money however they want.
Q: Does a custodial account have to be used for college?
A: No. While your child is a minor, the money can pay for anything that benefits the child. After they reach the age of majority, there are no restrictions at all.
Q: What is the kiddie tax?
A: It is a rule created by the Tax Reform Act of 1986 to stop parents from shifting assets into children’s names to pay a lower tax rate. For 2025 and 2026, a child’s unearned income over $2,700 is taxed at the parent’s rate.
Q: Can I take the money back if I change my mind?
A: No. Deposits into a custodial account are irrevocable transfers that belong to the child. A 529 plan works differently, because the adult who owns the account stays in control.
This article is for general information and education only and isn’t personal financial, tax or legal advice. Rates, fees and rules change, so check current details with the provider or an official source before making decisions.