How to Open a Custodial Brokerage Account for Your Kids

Written by Banks Editorial Team
2 min. read
Written by Banks Editorial Team
2 min. read

Parents commonly use custodial brokerage accounts to help save for college. But you can also use these accounts to instill money lessons into your children and show them how to grow their money by investing. 

But before you open a custodial brokerage account for your children, it’s essential to understand how they work, along with the benefits and drawbacks they offer. 

Read on to learn more about these accounts and how to open one for your minor children.  

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What is a Custodial Brokerage Account?

You can use a custodial brokerage account to save for your child’s future. Grandparents, aunts, uncles and family friends can also open custodial accounts for minors. 

The account is the property of the child. However, it’s managed by the custodial parent(s) or adult until the child reaches adulthood or the age of majority, as determined by your state of residence. 

You can contribute up to $30,000 annually to a custodial brokerage account, and there are no overall contribution limits. And if the assets held in the account generate interest, this amount can be assessed kiddie tax. 

There are two types of custodial accounts – UTMAs and UGMAs. More on this shortly. 

The Benefits of a Custodial Brokerage Account

  • There are no restrictions on how the assets can be used once the child reaches the age of majority. 
  • You’re permitted to contribute as much as you want over time as long as you don’t exceed the annual contribution limit. 
  • You won’t pay gift tax on annual contributions.

The Disadvantages of a Custodial Brokerage Account

  • If the child uses the funds for college-related expenses, the account won’t receive any tax benefits. 
  • The financial aid office at the child’s college or university may consider the value of the assets when calculating the child’s estimated financial need and eligibility for scholarships and student loans. 
  • You’ll still be on the hook for kiddie taxes on earnings.

What Is the Difference Between UTMAs and UGMAs?

Here’s the difference between the two types of custodial accounts: 

  • Uniform Transfers to Minors Act (UTMA) account: These accounts can be used to hold almost any type of asset. 
  • Uniform Gift to Minors Act (UGMA) account: These accounts can include annuities, cash and securities.

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Should You Open a Custodial Brokerage Account 

Custodial brokerage accounts afford lots of flexibility that you won’t find with other investment vehicles designed to help save for your child’s future. For starters, your child can use the funds however they see fit when they get possession of the account. 

But there’s a drawback – if you open a custodial brokerage account solely for the purpose of saving for college, it won’t get the same preferential tax treatment that comes with 529 plans and Coverdell Education Savings Accounts

The upside is your child won’t be on the hook for federal income tax when they decide to withdraw the funds. 

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