Custodial Accounts Explained: UGMA, UTMA, and the Custodial Roth IRA

If you want to invest money for a child in the US, you have more options than most people realize, and the differences between them matter a great deal for taxes, control, and how the money can eventually be used. A standard custodial account hands your child the full balance, no strings attached, at eighteen or twenty-one. A custodial Roth IRA grows completely tax-free, potentially for half a century. A 529 plan locks the money to education or charges a penalty. Pick the wrong one and you can end up paying tax you did not need to, handing over control sooner than you meant to, or boxing the money into a single use.

None of these are obscure or hard to open. The confusion is not about access but about choice: which vehicle fits which goal, and how the rules interact. This guide walks through each type of custodial account, when to use which, the tax rules that trip people up, including the kiddie tax, and the custodial Roth IRA strategy that quietly outperforms almost everything else for a child lucky enough to qualify. The dollar figures and tax thresholds are current for the 2026 tax year, and because several of them change annually, it is always worth checking the latest before you act.

One framing to carry throughout: the investment you hold inside any of these accounts is largely the same, a low-cost, broadly diversified fund held for the long haul. What differs is the wrapper around it, and the wrapper, with its rules on tax, control, and use, is what this guide is really about. Two quick clarifications before we start, because they cause a lot of confusion. A custodial account is not the same as a 529 college-savings plan, though both are ways of investing for a child; the custodial account is the child's money to use however they like, while a 529 is tied to education. And a custodial account is different again from a custodial Roth IRA, which is a retirement account with its own rules. All three appear in this guide, and knowing which is which is half the battle, because the names sound alike but the tax treatment, the control, and the permitted uses pull in quite different directions.

What Is a Custodial Account?

A custodial account is an investment or savings account that an adult, the custodian, opens and manages on behalf of a minor. The defining feature, and the one that surprises people, is that the money legally belongs to the child from the moment it goes in. The custodian controls how it is invested, but they are managing the child's property, not their own, and they cannot take it back. When the child reaches the age of majority, which is eighteen or twenty-one depending on the state and the account, full control passes to them, irrevocably and without conditions. That irrevocability is the part most worth sitting with. Because the gift is the child's the moment it is made, you cannot later decide you need the money back, change the beneficiary to a sibling, or impose conditions on how it is spent. This is unlike a 529, where the account owner keeps control and can even change who the money is for. The trade-off is real: a custodial account is simpler and more flexible in what the money can buy, but it gives up the ongoing control some parents would rather keep. Knowing this up front prevents the unpleasant surprise of discovering, years later, that the account is not yours to direct.

• The money is the child's from day one. Contributions are an irrevocable gift. You cannot withdraw the money for your own use, and what you put in cannot be undone.
• There are no contribution limits. Unlike a 529 or a Roth IRA, you can put in as much as you like, subject only to gift-tax rules on very large amounts.
• There are no restrictions on how the money is used. Unlike a 529, which is tied to education, custodial money can be spent on anything that benefits the child while they are a minor, and on anything at all once they take control.
• Control transfers at the age of majority. At eighteen or twenty-one, depending on the state, the child takes over completely. The custodian has no veto and no claw-back.

Two laws define these accounts: the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, which give us the UGMA and the UTMA. They are similar, and people use the terms loosely, but there are differences worth understanding before you open one. Both have been around for decades and exist in some form in every state, which is why custodial accounts are so widely offered and so easy to open. They were created to solve a practical problem: minors generally cannot own securities or sign binding contracts, so without a mechanism like this, giving a child stocks or funds would be legally awkward. The UGMA came first; the UTMA followed as a broader, more modern version, and most states have since adopted it. When a brokerage today offers a custodial account, it is almost always a UTMA, even if the marketing simply calls it a custodial or minor account.

UGMA vs UTMA: What's the Difference?

Both are custodial accounts, and both work the same way at heart: an adult manages a gift that legally belongs to a child until they come of age. The differences come down to what the account can hold and how long the custodian keeps control.

In practice, the UTMA is the one most families end up with, because it is more flexible and is what most brokerages offer by default. For the typical parent investing in funds, the broader asset rules barely matter, since you are holding stocks and funds either way. The difference that does matter is the age of majority. In some states a UTMA lets the custodian keep control until twenty-one, or even twenty-five, rather than eighteen, which can buy valuable extra years before a young adult takes the wheel. It is also worth knowing that you generally cannot mix and match: an account is opened as one or the other at the start, and switching afterwards is not straightforward. In practice this rarely causes problems, because the UTMA is both the default and the better fit for almost everyone. The one situation where the distinction bites is the handover age, which is fixed when the account is created and cannot be quietly extended later if you change your mind. For that reason, the few minutes spent checking your state's rules and choosing the age deliberately, where a choice exists, are minutes well spent.

The age of majority varies by state and is worth checking before you open the account, because it is one of the few things you cannot easily change later. Some states default to eighteen, others to twenty-one, and a handful let the custodian choose to extend it to twenty-one or twenty-five when the account is set up. We have deliberately not printed a full fifty-state table here, because these ages are amended from time to time and a stale table is worse than none. Look up your own state's current UTMA age, and if keeping control a little longer appeals, check whether your state lets you elect a later age at the outset.

The Custodial Brokerage Account

When people say custodial account, this is usually what they mean: a UGMA or UTMA brokerage account that invests in the market on a child's behalf. It is the most flexible vehicle in this guide, and the simplest to understand. Think of it as an ordinary brokerage account with one difference: the owner is a minor, so an adult operates it on their behalf until they grow up. Everything else, the way you buy funds, the statements, the daily price movements, looks exactly like a regular taxable account, because that is essentially what it is. That familiarity is part of the appeal. There is nothing exotic to learn, no special product to track down, and no education requirement or earned-income test to satisfy. You open it, you fund it, you choose investments, and you let it grow. The complications, such as they are, come at tax time and at the handover age, not in the day-to-day running.

• Open one at any major brokerage. Fidelity, Schwab, Vanguard, and the rest all offer custodial UTMA accounts, usually with no minimum and no account fee.
• Invest in the full range. Stocks, bonds, ETFs, and mutual funds are all available, exactly as in an adult brokerage account.
• Contribute as much as you like. There is no annual cap, unlike a 529 or a Roth IRA, though very large gifts interact with the gift-tax rules covered later.
• Spend it on anything for the child. There are no restrictions on use, which makes it the most flexible of all the options, at the cost of the tax treatment we will come to.

As for what to put inside it, the advice is the same as for any long-term portfolio: keep it simple and cheap. A total US stock market ETF, or an S&P 500 fund, is the default most parents reach for, and adding a global fund brings international diversification. Over an eighteen-year horizon, low-cost index funds beat the great majority of actively managed alternatives, and our guide to index funds explains why in more detail. The temptation to pick individual stocks for a child is best resisted; breadth and low costs win over time.

Lump sums do the same work. A single $10,000 invested at birth and left alone grows to roughly $40,000 by eighteen at an 8% average. Even modest, regular gifts add up: $500 at every birthday for eighteen years becomes around $19,000, of which only $9,000 was given. The pattern runs through every account in this guide. The earlier the money goes in, the more of the final figure is growth rather than contribution, and the harder it is to catch up by starting late. Before we get to the drawback, it is worth being clear about who the plain custodial brokerage account suits best. It shines when you want total freedom over how the money is eventually used, a first car, a house deposit, a gap year, a business, anything at all, rather than locking it to education or retirement. It also suits families who simply want to keep things simple and do not have a child with earned income to fund a Roth. The kiddie tax only really bites on larger balances that throw off significant dividends and gains, so for a modest account contributed to steadily, the tax drag is small and the flexibility is worth a great deal. That tax is where we turn next.

The Custodial Roth IRA: The Strategy Most Parents Miss

Here is the vehicle most parents have never heard of, and the one that can do the most: a Roth IRA opened in a child's name, with a parent acting as custodian. It is a real retirement account, with the child as the owner, and it carries the single best tax treatment in the US system. The catch, and the reason it is so underused, is a requirement we will come to: the child must have earned income. It helps to be clear about what a Roth IRA is, since not every parent has one themselves. It is a retirement account you fund with money that has already been taxed, in exchange for never being taxed on it again, not on the growth, and not on qualified withdrawals in retirement. For an adult near retirement that deal is good. For a child with sixty years ahead of them, it is close to extraordinary, because the tax-free compounding has so long to work. The custodial version simply lets a minor hold one, with a parent at the controls, until they are old enough to manage it themselves.

What makes it extraordinary is the combination of tax treatment and time. Contributions go in after tax, but everything after that is tax-free: the growth is never taxed, and qualified withdrawals in retirement are never taxed either. Contributions, as opposed to earnings, can be taken out at any time without tax or penalty, which gives a surprising amount of flexibility. And because a child starting at, say, ten has fifty years or more until retirement, the tax-free compounding has an almost absurdly long runway. A dollar in a child's Roth has decades to multiply, entirely shielded from tax. The flexibility is underrated too, and it eases a common worry. Because contributions, the money actually paid in, can be withdrawn at any age without tax or penalty, the Roth is not the one-way lockbox people imagine. If the now-adult child genuinely needs some of the money before retirement, the contributions are available; only the growth is meant to stay until age fifty-nine and a half. That makes a custodial Roth less rigid than a 529, which penalizes non-education withdrawals, while still nudging the money toward staying invested for the long haul.

An example shows the scale. Suppose a child earns money from age ten and contributes $3,000 a year to a custodial Roth until they turn eighteen, then never adds another cent. That is $24,000 of contributions in total. Left invested in a broad stock fund at a historical average return, that $24,000 could grow to well over half a million dollars by the time they reach their early sixties, every dollar of it tax-free. Few financial moves available to an ordinary family come close, and it is open to any child with legitimate earnings. The reason the number gets so large is entirely down to time, not to any heroic contribution. Twenty-four thousand dollars is not a fortune, and it is spread across eight years of a child's modest earnings. What turns it into half a million is the forty-odd further years it then spends compounding untouched, doubling roughly every decade, with no tax ever taken out along the way. Run the same contributions in a taxable account and the result is far smaller, because tax on dividends and gains nibbles at the compounding every year. The Roth removes that drag entirely, which is why, given a long enough runway, it pulls so far ahead of every alternative.

The earned income requirement is the whole game, and it is strict. A child can only contribute to a Roth IRA if they have earned income, meaning money from work, reported as wages or self-employment. Investment gains, allowance, and gifts do not count. The rules are worth getting right, because the IRS can ask you to back them up. The logic behind the rule is simple enough once you see it: a Roth IRA is a retirement account for workers, so the law ties contributions to work. A child with a paper round or a summer job has earned income and qualifies; a child whose only money comes from birthday checks and a savings account does not. This is the single thing that disqualifies most young children from a Roth, and it is why the strategy tends to come into its own in the teenage years, when babysitting, tutoring, lifeguarding, or a first part-time job start to generate real, reportable earnings. Until then, a plain custodial account or a 529 is usually the more practical route.

• It must be genuine earned income. Wages on a W-2, or self-employment income, both qualify. Unearned income such as dividends, interest, or birthday money does not.
• Common sources for children. Mowing lawns, babysitting, dog walking, tutoring, working in a family business, acting or modeling, and increasingly social media or content income all count, provided the work is real.
• Contribute up to the lower of earnings or the annual limit. If the child earns $2,000 in a year, that is the most that can go into the Roth that year, even though the limit is higher. If they earn more than the limit, the limit applies instead.
• The dollars need not be the same dollars. The child can spend what they earn, and a parent or grandparent can contribute an equivalent amount to the Roth on their behalf, up to the earned-income figure. What matters is that the earnings genuinely existed.
• Keep records. Document the work and the income: who paid, for what, how much, and when. For informal jobs like babysitting, a simple log is sensible. This is the part the IRS may later want to see.

The contribution limit is the same as for an adult Roth IRA, which is $7,500 for the 2026 tax year, but it is capped at the child's actual earned income if that is lower, which for most children it will be. So a teenager earning $4,000 from a summer job can contribute up to $4,000; a younger child earning a few hundred dollars can contribute that few hundred. The limit, like most of these figures, is adjusted from time to time, so check the current year's number before contributing.

Inside the Roth, the right investment is the same simple, growth-oriented choice as elsewhere, only more so. With a horizon measured in decades, there is little reason to dilute the growth with bonds, so a total stock market or global equity index fund, or a target-date fund set far in the future, fits well. The longer the money has to compound tax-free, the more the all-equity choice pays off, and for a child it has longer to run than for almost anyone. There is a subtle bonus to holding the most growth-oriented assets specifically inside the Roth, rather than in a taxable custodial account. Because Roth growth is never taxed, the assets you expect to grow the most are precisely the ones you most want sheltered there; every extra dollar of growth is a dollar that escapes tax entirely. The same logic runs in reverse for a plain custodial brokerage account, where heavy growth eventually bumps against the kiddie tax. So if a family runs both, the instinct should be to put the highest-growth holdings in the Roth. For most people, though, a single broad index fund in each is more than good enough.

One firm caution. Because the tax benefit is so large, the temptation to manufacture earned income is real, and it does not hold up. Paying a three-year-old thousands of dollars for help around the office is not legitimate, and the IRS treats sham arrangements harshly. The income must be for real work, at a reasonable rate for what was actually done, and properly documented. Used honestly, with a child who genuinely earns, the custodial Roth is close to unbeatable. Used as a tax dodge, it is a liability. The line is simple: real work, real pay, real records.

Custodial Account Taxes: The Kiddie Tax

This is where a plain custodial account gets less straightforward. Because the money is the child's, the income it generates is the child's too, and a set of rules called the kiddie tax governs how that income is taxed. The point of the rules is to stop families from sheltering large amounts of investment income at a child's low rate, and they work in three tiers. The name is informal but the rules are not; they sit in the tax code and apply automatically once a child's investment income passes the thresholds. The thinking behind them is to close what would otherwise be an obvious loophole: without the kiddie tax, high-earning parents could shovel investments into a child's name and have the income taxed at the child's tiny rate instead of their own. The rules stop that by taxing the bulk of a child's investment income as if it were the parent's. For ordinary families investing modest amounts, the thresholds are high enough that little or no kiddie tax is ever due, but it is worth understanding before a custodial account grows large.

In plain terms: if a custodial brokerage account throws off more than $2,700 a year in dividends and realized gains, the excess is taxed at your rate, not the child's. For a large or actively traded account, that can quietly erode the benefit, because you end up paying your own marginal rate, perhaps 24% or 32%, on the child's investment income. It is not a disaster, but it is the main reason a plain custodial account is less tax-efficient than the alternatives once the balance gets large. How large is large, in practice? It depends entirely on what the account holds and how much income it generates rather than on the balance alone. A growth-oriented index fund yielding, say, 1.5% would need a balance approaching $180,000 before its dividends alone crossed the $2,700 line, and even then only the excess is taxed at your rate. Realized capital gains add to that figure, which is why frequent selling matters. The upshot is that a steadily built account holding a low-dividend fund can grow surprisingly large before the kiddie tax becomes a meaningful cost, and a Roth, where the question never arises, removes the concern entirely.

There are ways to keep the kiddie tax small, and they mostly amount to generating less taxable income along the way.

• Favor growth over income. Broad index funds that pay modest dividends and that you rarely sell generate little taxable income, because unrealized gains are not taxed until you sell.
• Avoid frequent trading. Every sale at a profit is a realized gain that may count toward the threshold, so a buy-and-hold approach keeps the taxable income down.
• Use the Roth instead for larger sums. A custodial Roth IRA sidesteps the kiddie tax entirely, because its growth is not taxed as unearned income at all.

That last point is worth drawing out, because it is the kiddie tax's mirror image. A custodial Roth IRA pays zero kiddie tax, ever. Its growth is not unearned income to be taxed each year; it is simply tax-free growth that becomes tax-free withdrawals later. This is precisely why, for a child with earned income, the Roth beats a plain custodial account for any sum large enough to bump against the kiddie-tax thresholds. It is worth stating the practical hierarchy this implies, because it cuts through a lot of the confusion. For a child with earned income, fill the Roth first, up to their earnings or the annual limit, since nothing else matches tax-free growth with no kiddie tax and no FAFSA hit. Only once the Roth is maxed, or for a child with no earned income, does the plain custodial brokerage account or the 529 come into play, chosen on the flexibility-versus-education trade-off. Seen this way, the kiddie tax is less a problem to be solved than a signpost pointing toward the Roth wherever a child qualifies for one.

One more consequence is easy to miss, and it matters for families expecting to apply for college financial aid. On the FAFSA, a custodial UGMA or UTMA account counts as the student's own asset, and student assets are assessed at up to 20% when calculating aid, far more harshly than parental assets, which are assessed at no more than about 5.6%. A 529 plan owned by a parent, by contrast, counts as a parental asset, and a Roth IRA is a retirement account that is not reported as an asset on the FAFSA at all. So a large custodial brokerage balance can reduce financial aid in a way a 529 or Roth would not. FAFSA rules have been revised in recent years, so it is worth confirming the current treatment if aid is a real prospect. The practical lesson is to think about timing and ownership if college aid is likely to matter. Some families deliberately spend a custodial account down on legitimate expenses for the child before the first FAFSA is filed, or weight new savings toward a 529 or a Roth, precisely to avoid the harsher student-asset treatment. None of this should override the bigger goal of investing early, but it is a genuine consideration for families who expect to qualify for need-based aid.

Custodial Account vs 529 Plan: Which to Use?

For families saving with education in mind, this is the decision that matters most. The three main vehicles pull in different directions on tax, control, flexibility, and financial aid, so the table lays them side by side. It helps to remember that these are not mutually exclusive, and the best answer for many families is some of each rather than a single winner. A 529 and a custodial Roth can happily coexist, doing different jobs: the 529 earmarked for tuition with its parental control intact, the Roth quietly building tax-free retirement wealth on the back of a teenager's earnings. The table that follows is a way of seeing the trade-offs at a glance, not a contest to be settled once and for all. Read down the rows for the feature that matters most to you, whether that is tax, control, flexibility, or financial-aid treatment, and let that guide the mix.

No single account wins outright; the right choice depends on the goal. A simple way to decide:

• Saving specifically for education? A 529 is usually best, with tax-free growth for qualified costs and the gentlest FAFSA treatment. Recent rules even let leftover 529 funds roll into the child's Roth IRA, up to a $35,000 lifetime cap, easing the old worry about overfunding.
• Want maximum flexibility on use? A custodial UTMA brokerage account has no restrictions, at the cost of the kiddie tax on larger gains.
• Does the child have earned income? Fund a custodial Roth IRA first. Tax-free growth, no kiddie tax, no FAFSA hit; it is hard to beat.
• Large amounts and a long horizon? Use a combination: max the Roth if eligible, a 529 for education, and a custodial brokerage for the rest.

What Happens When the Child Reaches Majority?

A custodial account hands full control to the child at a set age, and parents are right to think carefully about it. At the age of majority for your state and account, eighteen or twenty-one, sometimes twenty-five for a UTMA that allows it, the child gains complete, irrevocable control. They can withdraw everything and spend it however they wish, and the former custodian has no veto and no way to restrict it. This has been the child's money all along; majority is simply when they can reach it. This is the single biggest difference between a custodial account and a 529, and it deserves to be weighed seriously rather than waved away. A 529 owner keeps control indefinitely and can redirect unused funds to another child; a custodial account does the opposite, surrendering all control on a fixed birthday. For a level-headed young adult, that is no problem at all, and may even be a welcome vote of confidence. For a parent genuinely worried about a particular child's judgment with a large sum, it is a real consideration, and one of the few good reasons to prefer a 529, a trust, or a later UTMA age over a plain custodial account.

If that prospect makes you uneasy, there are sensible ways to manage it short of not investing at all.

• Choose a UTMA in a state that allows a later age. Where your state permits twenty-one or twenty-five, electing the later age at opening buys years before the handover.
• Use a 529 for education money. Because the account owner keeps control of a 529, education funds stay under your hand rather than passing to the child outright.
• Lean on the Roth for retirement money. A Roth is psychologically stickier; a young adult is less likely to raid a retirement account, especially once they understand the penalty for withdrawing earnings early.
• For very large sums, consider a trust. A formal trust costs more and is more complex, but it lets you set conditions a custodial account cannot. It is worth advice when the amounts are significant.
• Above all, teach them. The single best safeguard is a child who understands what they have and why keeping it invested usually beats spending it.

It is worth keeping the fear in proportion. The young adults who blow through a custodial account are, in practice, usually the ones who were never told it existed and never involved in it. Those who watched it grow, understood where it came from, and learned a little about investing along the way tend to treat it with respect. Preparation does far more than control ever could. It also helps to give the handover some shape rather than letting it arrive cold on an eighteenth birthday. A short conversation in the months beforehand about what the money is for, an agreement to leave the bulk of it invested, perhaps a small portion freed up for something the young adult chooses, turns an abrupt transfer of power into a planned step. Treated that way, the handover becomes part of the financial education rather than a cliff edge. The years of involvement that came before are what make that conversation land, which is the whole argument for bringing a child into the story early rather than springing a five-figure sum on them as a surprise.

How to Open a Custodial Account

Opening one is quick, often less than fifteen minutes online. The steps are much the same at any major brokerage.

1. Choose a brokerage. Fidelity, Schwab, and Vanguard all offer custodial UTMA accounts with no minimum; pick one you are comfortable with.
2. Gather the details. You will need your Social Security number, the child's Social Security number, and the child's date of birth.
3. Select UGMA or UTMA. UTMA is the usual choice, and the platform will default to it in most states.
4. Fund the account. Transfer money from your bank, or set up an automatic monthly contribution so it builds without you having to think about it.
5. Choose investments. A total-market or S&P 500 index fund is the standard default. Set it and leave it.

For a custodial Roth IRA, the process is the same, with one addition: you will document the child's earned income. Not every brokerage offers a custodial, or minor, Roth, but the large ones including Fidelity and Schwab do, so check that the provider supports it before you start. In practice, documenting the income is less daunting than it sounds. For a child with a formal job, the W-2 does the work for you. For informal earnings such as babysitting or yard work, keep a simple running record of dates, who paid, what the work was, and how much, the sort of thing a notebook or a spreadsheet handles easily. You generally do not file anything special to open or fund the Roth, but you keep the records in case the IRS ever asks. Set up the account once, automate or make annual contributions up to the child's earnings, choose a single broad fund, and the ongoing effort is minimal.

Teaching Your Child About Their Account

The thread running through this guide is that the account does its best work when the child grows up understanding it. A short, age-appropriate progression is all it takes.

Tracking Your Child's Investments

As the account grows, you will want to keep an eye on it, and showing it to your child later is part of the education. Endute lets you add custodial accounts alongside your own portfolio. Enter the holdings by hand, the fund names and share counts, and Endute pulls daily price updates from more than 250,000 securities, so your child's UTMA or custodial Roth appears next to your own 401(k), Roth IRA, and brokerage account. The whole family's picture sits in one view, which makes it easy to track progress and, in time, to show a teenager exactly how their money has compounded. See how it works on our features page.

Frequently Asked Questions

What is a custodial account?

A custodial account is an investment account an adult opens and manages on behalf of a child. The money legally belongs to the child from the moment it is contributed, the adult controls the investments until the child reaches the age of majority, and at that point, eighteen or twenty-one depending on the state, the child takes full and irrevocable control. There are no contribution limits and no restrictions on how the money is used.

What is the difference between UGMA and UTMA?

Both are custodial accounts. A UGMA can hold financial assets such as cash, stocks, and funds; a UTMA can hold those plus property like real estate. The UTMA is newer, more flexible, and more common, and in some states it lets the custodian keep control until twenty-one or twenty-five rather than eighteen. For most parents investing in funds, the practical difference is the age at which the child takes over.

What is a custodial Roth IRA?

A custodial Roth IRA is a Roth retirement account opened in a child's name, with a parent as custodian. Its growth and qualified withdrawals are entirely tax-free, which over decades is extraordinarily powerful. The catch is that the child must have earned income from real work to contribute, and only up to that amount or the annual limit, whichever is lower. The annual limit is $7,500 for 2026.

Can a child have a Roth IRA?

Yes, as long as the child has earned income. There is no minimum age. A child who earns money from work, whether babysitting, a family business, or formal employment, can have a custodial Roth IRA funded up to their earnings or the annual limit, whichever is less. The earnings must be genuine and documented; allowance and gifts do not count.

What is the kiddie tax?

The kiddie tax governs how a child's investment income is taxed. For 2026, the first $1,350 of a child's unearned income is tax-free, the next $1,350 is taxed at the child's own rate, and anything above $2,700 is taxed at the parent's marginal rate. It mainly affects larger custodial brokerage accounts; a custodial Roth IRA avoids it entirely, because its growth is not taxed as unearned income.

Should I open a custodial account or a 529?

It depends on the goal. A 529 is best for money earmarked for education, with tax-free growth for qualified costs and gentler financial-aid treatment. A custodial brokerage account is best when you want no restrictions on how the money can be used, accepting the kiddie tax on larger gains. If the child has earned income, a custodial Roth IRA is usually the most tax-efficient of all. Many families use a combination.

At what age does a child get control of a custodial account?

It depends on your state and the type of account, but it is usually eighteen or twenty-one, and in a few states a UTMA can be set to twenty-five. At that age control passes to the child completely and irrevocably, with no parental veto. Check your own state's age before opening, since in some states you can elect a later one at the outset.

The right account for your child comes down to a few clear questions. Does the child have earned income? If so, a custodial Roth IRA, with its tax-free growth for decades, is hard to beat. Is the money for education? A 529 keeps it tax-free for that purpose and under your control. Do you want maximum flexibility? A custodial UGMA or UTMA brokerage account imposes no restrictions, at the cost of the kiddie tax on larger gains. Many families use more than one: the Roth first if eligible, a 529 for college, and a custodial brokerage for the rest. Whichever you choose, start as early as you can, because eighteen years of compounding is the part no account can replace.

A few things are worth a closer look as you decide. For how a Roth IRA fits alongside other US accounts, see our comparison of a Roth IRA, a 401(k), and a taxable brokerage. For the big-picture view across countries, our guide to investing for your child's future sets out the whole landscape, and readers in the UK will find their equivalent covered in the junior ISA guide.

This article is for educational and informational purposes only. It does not constitute financial, tax, or legal advice. Tax rules and contribution limits change annually, so verify current figures with the IRS or a qualified tax professional. The value of investments can go down as well as up.