A custodial account is a special kind of savings account you can open in the name of a minor.
Many financial institutions – banks, investment firms, brokerage firms, mutual fund companies – offer custodial accounts. It can be opened by the parent, guardian, or family member.
As a custodian, you’ll have complete control of the savings and investments in the account.
The most common institution to open a custodial account is an investment firm. That’s because the account will usually earn more capital gains over time, resulting in more ROI (return on investment).
When the minor who holds the account turns 18 (or 21, depending on state laws), they will take control of the account.
That means they’ll have the right to perform all financial operations without the custodian’s approval.
Types of Custodial Accounts
There are two other ways to refer to a custodial account – a UTMA account or a UGMA account.
They both generally refer to a custodial type of account, with a few differences between them.
UTMA
UTMA stands for Uniform Transfers to Minors Act. A UTMA account can hold a variety of assets – financial and other.
These can include real estate, intellectual property, or works of art, for example.
UGMA
UGMA stands for Uniform Gifts to Minors Act. A UGMA account can hold only financial assets in the name of a minor.
These can include mutual funds, investments, cash, and so on.
9 Best Custodial Accounts
Here are the 9 best custodial accounts you can choose from today:
- Charles Schwab: Best Custodial Brokerage Account
- Ally Bank: Best Custodial Bank Account
- TD Ameritrade: Best College Savings Account
- Fidelity Investments: Best Tools and Resources
- FutureAdvisor: Best Robo-Advisor
- Stockpile: Best Teaching Experience
- Vanguard: Best for Mutual Funds
- E*TRADE: Best Online Broker
- Stash: Best Finance App
1. Charles Schwab: Best Custodial Brokerage Account
Charles Schwab offers the best custodial brokerage account on the market.
Schwab One Custodial Account has all the perks of a regular custodial account (no contribution limits, tax benefits, and so on), plus some more:
- no minimum opening deposit
- no monthly service fees
- free online stocks trades
- $0 commission on ETFs
- SIPC insured
Schwab also has 24/7 customer service support and an investment fiduciary financial advisor to help you invest better.
If you’re already a client, you can manage everything online using only one login and password.
The mix of excellent service and zero fees make Schwab’s an appealing account.
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2. Ally Bank: Best Custodial Bank Account
Ally is an online-only bank that earns a high APY – a factor that makes its Child Savings Account worth considering.
It’s an excellent choice if you’d prefer keeping the account’s funds in cash rather than investing that money.
Some perks of Ally, other than high-interest rates:
- online transfers
- remote check deposits
- fee-free
- great app and online banking
- FDIC insured
Ally Bank may seem a better option if you feel unsure, but remember that your potential ROI is lower with a simple savings account than an investment firm.
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3. TD Ameritrade: Best College Savings Account
TD Ameritrade can help you with your college savings plan.
Ameritrade advertises its UGMA/UTMA account as an education savings account. Its website states: “Just think of us as your investing for college tutor.”
TD has other options for you to save for your child’s college expenses, such as 529 plans and ESAs.
Still, the custodial account is the only one that doesn’t have a contribution limit and doesn’t strictly regulate qualified expenses.
A great perk of this account is its Trading Platform, called “ThinkorSwim,” which is high-tech and high-performing.
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4. Fidelity Investments: Best Tools and Resources
Fidelity Investments is the top choice when it comes to investment tools and resources.
Fidelity is well known as a brokerage firm for retirement accounts. The characteristics that make it an excellent option for retirement funds are the same that make it a sound option for custodial accounts.
Fidelity’s main strength is the research section in the account, which contains financial analysis and reports from the biggest stock and fund research institutions.
In addition, at Fidelity, you can find other investments offered in the prospectus, such as trades starting from $4.95 and fee-free mutual funds, among others.
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5. FutureAdvisor: Best Robo-Advisor
FutureAdvisor is a Robo-advisor that works in conjunction with an investment account from either Fidelity or TD Ameritrade.
If you like the idea of just adding funds to the account and letting others do the rest while still earning money, FutureAdvisor is the best choice for you.
You’ll only need to specify your risk tolerance and investment objectives. Future’s Robo-Advisor will then match them to the investments it will select for you.
The fee in exchange for FutureAdvisor investing aid is 0.5% on the total value of your assets, and it is paid annually.
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6. Stockpile: Best Teaching Experience
If you’d like to save for your child’s future and at the same time make it a learning experience, Stockpile can help you do just that, thanks to its fun and user-friendly mobile app.
Stockpile is an investment firm that offers free accounts, a large variety of ETFs and stocks, and charges only 99 cents for all trades.
With Stockpile, you can also buy a fraction of stock starting from $5.
Contributing to the custodial accounts is made very easy by Stockpile. Every family member (including the account custodian) can contribute to the account through gift cards available online.
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7. Vanguard: Best for Mutual Funds
Though Vanguard doesn’t offer a wide variety of stocks and bonds, it’s known for its low-fee funds.
Investing in a mutual fund with Vanguard is one of the cheapest options on the market. They let you avoid all of the usual costs, including commissions and ETF fees.
That might be why an increasing number of customers choose Vanguard, which as a result, is currently managing more assets than any other broker.
If you invest with Vanguard, keep in mind that you’ll only be able to buy stocks and mutual funds coming from the Vanguard family.
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8. E*TRADE: Best Online Broker
E*TRADE is a well-established online broker with a custodial account that’s definitely worth considering.
The best deal at E*TRADE is on mutual funds. They offer 4,400 no-load and no-fee mutual funds—an impressive amount of free long-term investment options.
On the other hand, stocks and options trades have a $6.95 fee, which is a little expensive.
Custodial accounts at E*TRADE follow UGMA and UTMA regulations, so up to $1,050 of annual earnings and annual gifts can be invested tax-free under the gift tax exclusion.
In addition, E*TRADE gives you access to a series of user account management tools, including research reports and analyst opinions.
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9. Stash: Best Finance App
Stash, a cool finance app aiming to make investing accessible to everyone, also offers custodial accounts.
A nice thing about Stash is that you can choose which plan is best for you among the 3.
Their first plan, Stash Beginner, costs only $1, but the custodial accounts are included only in their premium plan called Stash+.
Stash+ lets you choose between 2 different custodial accounts, and it costs $9 a month. On top of the custodial accounts, it includes a smart portfolio, life insurance, and premium research and advice, among other features.
Stash’s goal is to simplify investing so that anyone can have access to it, even children. As a result, more than 5 million people have chosen Stash to reach their financial goals.
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Requirements To Open a Custodial Account
The requirements to open a custodial account are usually:
- an SSN (Social Security Number)
- a driver’s license or another form of ID
- employer’s information (if available)
- previous bank statements (if applicable)
- the child’s details (name, last name, birthdate, SSN, etc.)
Pros & Cons
PROs: Tax Advantages and Flexibility
Even though custodial accounts aren’t tax-deferred like IRAs, some of their most important advantages are tax-related.
Since the minor is officially holding the custodial account, the IRS taxes the earnings on this account using the child tax rate until a certain point.
Currently, the first $1,100 of unearned income isn’t taxed. After that, there will be a 10% income tax on up to another $1,100. Beyond $2,200, your income is taxed at the custodian’s rate.
When minors turn 18 or 21, depending on which one is the age a child reaches majority in the state of residency, the appropriate tax bracket will apply.
Reduced tax rates on a certain amount of “unearned income” can apply even to adults up to 24 years old. However, they need to be full-time students and file it as part of the parent’s tax return.
Another great perk offered by custodial accounts is flexibility. For example, there are no income requirements, contribution limits, or mandatory regular distributions.
You can withdraw freely from these accounts without facing penalties or fees. Still, your withdrawals have to be for something that benefits the minor child.
CONs: Not Reversible and Diminish Financial Aid
The first disadvantage is that these accounts might hurt a minor’s chances to access financial aid in the future.
The holdings are official assets that the child owns in his/her name, so they count towards college financial aid eligibility or other forms of community or government aid.
Keep in mind that contributions to a custodial account are irreversible. You won’t be able to change your mind once you’ve contributed – all contributions are final.
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Custodial Accounts FAQs
How Does a Custodial Account Work?
A custodial account is a savings account you can open in a minor’s name and fully manage until the minor reaches the age of majority.
Can You Withdraw Money from a Custodial Account?
Yes, you can withdraw money from a custodial account without incurring any fees, but every withdrawal must benefit the minor who holds the account.
Who Pays Taxes on a Custodial Account?
The child beneficiary of the custodial account files tax as part of the parents’ tax returns.
Some earnings on this account are tax-free, and since the child is the owner of the account, IRS applies the child tax rate until a certain point (also called kiddie tax). After that, the appropriate tax bracket will apply.
What is the Best Custodial Account?
We’ve picked the nine best custodial accounts on the market right now (read more about each account provider below).
Based on our research, the very best custodial account is right now the Schwab One Custodial Account by Charles Schwab.
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