How to Open a Custodial Account for Your Kids

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Why Start a Custodial Account in 2025?

Parents everywhere—from tech-savvy millennials to thoughtful educators like Sarah Johnson, a 36-year-old teacher from Columbus, Ohio—are realizing the power of early investing. And one tool that’s gaining popularity? The custodial account.

With the rising cost of education, housing, and life in general, starting an investment account for your kids can provide a solid financial head start. Whether it’s for college, their first car, or a future business idea, a custodial account benefits children by giving them both funds and financial literacy.

👉🎯 If you're Googling "how to invest for kids" or "best investment account for kids 2025"—you’re in the right place!


>What is a Custodial Account?

A custodial account is a financial account set up by an adult (usually a parent or guardian) on behalf of a minor. The account is legally owned by the child, but managed by the adult until the child reaches adulthood (usually 18 or 21, depending on the state).

UGMA vs UTMA Explained

  • UGMA (Uniform Gifts to Minors Act): Allows financial assets like stocks, bonds, and mutual funds.

  • UTMA (Uniform Transfers to Minors Act): Includes all UGMA assets plus real estate, artwork, and more.

Both are custodial accounts in the USA, but UTMA offers more flexibility in the types of assets you can transfer.

Ownership & Taxes: What Parents Should Know

  • The child legally owns the account.

  • The custodian manages the account until the child comes of age.

  • Earnings may be subject to the kiddie tax (more on that later).

Benefits of Opening a Custodial Account

✅ Long-Term Investment Growth

Thanks to compound interest and market growth, small monthly investments can grow into significant funds over time. Starting at age 6 or 10 gives your child a powerful advantage.

✅ Flexible Usage

Unlike 529 college savings plans, custodial accounts don’t limit what the funds can be used for. They can cover college, a car, travel, or even a down payment on a home.

✅ Builds Financial Literacy

When your child turns 18 or 21, they take over the account—providing a hands-on opportunity to learn about saving, investing, and budgeting.

Step-by-Step: How to Open a Custodial Account

1. Choose a Platform

Look for a trusted investment platform with low fees and a user-friendly mobile app—something you can check during lunch breaks or between classes. Popular options include:

  • Fidelity Youth Account

  • Vanguard UGMA/UTMA

  • Acorns Early

(We’ll explore these in-depth later.)

2. Gather Required Documents

Most custodial account providers will ask for:

  • Your Social Security number

  • Your child’s SSN

  • Government-issued ID (driver’s license)

  • Your child’s birth certificate (optional but helpful)

3. Fund the Account

You can start with as little as $5 or $50. Some apps even offer round-up features, investing your spare change.

4. Choose Your Investments

You don’t need to be a stock expert! Choose from:

  • Target-date mutual funds

  • Low-cost index funds (like the S&P 500)

  • ETFs (Exchange-Traded Funds)

Start simple and let your investments grow over time.

Top 3 Platforms to Open a Custodial Account in 2025

✅ Fidelity Youth Account

  • Pros: $0 account fees, no minimum balance, intuitive app

  • Cons: Limited to teens age 13+, but parents can start UGMA/UTMA for younger kids separately

  • Best For: Parents who want to give their kids hands-on experience as they grow

✅ Vanguard UGMA/UTMA

  • Pros: Low-cost index funds, trusted brand

  • Cons: Slightly higher minimums ($3,000 for some funds)

  • Best For: Long-term growth with minimal maintenance

✅ Acorns Early

  • Pros: Automatic round-ups, family plan includes multiple kids, easy-to-use mobile app

  • Cons: $5/month fee

  • Best For: Busy parents like Sarah who want to set and forget

Tax Considerations for Parents

Understanding taxes is crucial when learning how to open a custodial account USA.

Kiddie Tax (2025 Rule)

As of 2025:

  • The first $1,300 in unearned income is tax-free.

  • The next $1,300 is taxed at the child’s rate.

  • Anything above that is taxed at the parent’s tax rate.

This is known as the kiddie tax—designed to prevent parents from sheltering income by putting it in their child’s name.

Reporting Earnings

Investment income must be reported during tax season. Most platforms provide annual tax forms. You may need to file on behalf of your child depending on the earnings.

What Happens When the Child Turns 18 or 21?

When your child reaches the age of majority, the account legally becomes theirs. Here’s what that means:

  • You lose control—your child can use the money however they choose.

  • Encourage financial responsibility before this transition.

Tips to Prepare Your Child:

  • Involve them in tracking their investments.

  • Talk about responsible spending and saving goals.

  • Use dashboard features on apps to show growth and market trends.

Related Articles:

Real-Life Example: Sarah’s $50 Monthly Plan for Her Daughter

Sarah Johnson, a middle school teacher from Columbus, Ohio, wanted to start investing for her 10-year-old daughter.

Her Plan:

  • Platform Chosen: Acorns Early

  • Monthly Investment: $50/month

  • Investment Option: Diversified ETF portfolio

10-Year Projection:

  • Estimated contribution: $6,000

  • Estimated growth: ~$9,000–$11,000 (assuming a 7% annual return)

  • Goal: Use for college, a used car, or a study abroad trip

This slow-and-steady plan fits Sarah’s budget and gives her peace of mind.

Conclusion: Give Your Child a Head Start Today

Opening a custodial account is one of the smartest gifts you can give your child in 2025. It sets them up not only financially—but also with a deeper understanding of money, investing, and responsibility.

And the best part? You don’t need to be a financial expert or invest thousands to start. Even $10–$50 a month makes a big difference.

💬 FAQs

Q1: What's the difference between a custodial account and a 529 plan?

A 529 plan is specifically for education and offers tax benefits for qualified expenses. A custodial account is more flexible—money can be used for anything that benefits the child, not just school.

Q2: Can I withdraw money from a custodial account before my child is 18?

Yes—but the money must be used for the benefit of the child. You can’t use it for your own bills or expenses.

Q3: Is a custodial account good for college savings?

Absolutely. While 529s are more tax-efficient for college, custodial accounts offer flexibility—ideal if your child may not attend a traditional four-year school.

Q4: How much can I contribute in 2025 without a gift tax?

You can contribute up to $18,000 per child per year in 2025 without triggering the federal gift tax.

Q5: What happens if the child uses the money irresponsibly at 18?

Once the child reaches adulthood, you no longer control the account. That’s why it’s crucial to educate them early about budgeting, saving, and smart decision-making.

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