UGMA and UTMA Custodial Accounts, Explained

A custodial account holds money or investments for a child. An adult, the custodian, manages it until the child reaches adulthood under state law. Then the account becomes theirs, to spend however they like.

They are one of the simplest ways to save for a child. They also come with a catch that parents often learn too late.

UGMA vs UTMA

The two names come from two model state laws.

• UGMA (Uniform Gifts to Minors Act) accounts can hold cash, stocks, bonds, mutual funds and insurance policies.
• UTMA (Uniform Transfers to Minors Act) accounts can hold all of that, plus other property such as real estate, art or royalties.

Almost every state has adopted UTMA. Most banks and brokers simply open whichever one your state uses, and for a child's savings or index fund account, the difference rarely matters.

The gift is permanent

Money put into a custodial account legally belongs to the child from the day it goes in. You cannot take it back, move it to a sibling, or spend it on yourself.

As custodian you can spend it on the child's behalf, for things that benefit them beyond normal parenting costs such as summer camp, a computer or tuition. You cannot use it for food, housing or other basics that parents are expected to provide.

When the child takes over

Control passes to the child at the age set by your state, usually 18 or 21. A few states allow the custodian to set a later age, up to 25.

At that point, the child can use the money for college, a car or a trip abroad, and the custodian has no say.

How it is taxed

Investment income in a custodial account is taxed to the child, under the rules known as the kiddie tax. For 2025:

• The first $1,350 of unearned income is tax-free.
• The next $1,350 is taxed at the child's rate.
• Anything above $2,700 is taxed at the parents' rate.

The thresholds rise slightly most years. For a small savings account, the interest will usually fall in the tax-free band.

Gifts into the account count toward the annual gift tax exclusion ($19,000 per giver per child in 2025). Below that, there is nothing to file.

The catch: financial aid

On the FAFSA, a custodial account counts as the student's asset. Student assets reduce aid eligibility at up to 20% of their value each year. Parent assets, including a parent-owned 529 plan, count at no more than 5.64%.

So $10,000 in a custodial account can reduce aid by up to $2,000 a year, compared with about $564 if the same money sat in a parent-owned 529.

Custodial account or 529?

Choose a 529 if the money is meant for education. Growth is tax-free when spent on qualified costs, it has a lighter effect on financial aid, and the parent keeps control.

Choose a custodial account if you want the money to be usable for anything, such as a first car, a deposit on an apartment or a business, and you are comfortable with the child controlling it at 18 or 21.

Some families do both. The college savings calculator shows what a monthly amount grows to by age 18.

How to open one

Most banks, credit unions and brokerages offer custodial accounts. You need the child's Social Security number and date of birth, and your own ID. There is usually no minimum at online banks and brokers.

FAQ

Can grandparents open one? Yes. Anyone can open a custodial account for a child and name themselves or someone else as custodian.

Can I convert a custodial account into a 529? Yes, but it becomes a custodial 529, which the child still owns. You would have to sell any investments first, which can trigger capital gains tax.

What happens if the custodian dies? A successor custodian takes over, usually named on the account or chosen under state law. Name one when you open the account.