As parents or guardians, we want to make sure that our children are in a good place financially when they get older.
Consider opening a custodial account to ensure your child starts out on the right foot. Custodial accounts allow a parent or guardian to gift or invest money for a child that, once an adult, can control as their own.
These accounts are typically in the minor’s name, but parents have control of the account until the child becomes an adult.
There are two types of custodial accounts: the uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). While mostly similar, the UGMA only allows for financial assets, such as stocks, bonds, and mutual funds, whereas a UTMA account can also hold other assets of value, such as art, jewelry, real estate, and other types of property.
If you are considering a custodial account for your child or grandchild, we’ll explore the best custodial accounts available, the pros and cons, and other aspects you should know before opening an account.
7 Best Custodial Accounts
Here are the best custodial accounts you can open today:
1. Charles Schwab
Founded in 1971, Charles Schwab is our overall top choice of the brokerage with the best custodial account. With the Schwab One Custodial Account, there is no minimum opening balance, maintenance fees, commissions for online stock and ETFs, or contribution limits. This account also comes with investment guidance and 24/7 customer support.
The Schwab One Custodial Account offers the benefits of the Schwab One Brokerage Account, including a range of investment options, including mutual funds, EFTs, securities, and more. Access to Schwab’s Stock Slices program also allows you to invest in fractional shares, given you meet the $5 minimum.
This account is ideal for self-directed investors and those who prefer automation. With access to Schwab Intelligent Portfolios, robo-advisors can be set up to build your portfolio based on your preferences. (However, there is a $5,000 minimum deposit for the basic portfolio and $25,000 for the premium).
- No fees
- 50+ years in the industry
- 24/7 customer service
- Does not allow trading of cryptocurrency
Acorns launched its app for iOS and Android in 2014, intending to simplify investing so anyone could earn money. The platform offers investment accounts for each stage of life; however, the Acorns Early account is what landed this brokerage on our list.
Acorns Early is a UTMA/UGMA account where you can fund and manage your children’s investment accounts in one app.
You’ll need a Family plan to access the Early plan, which is $5 monthly. This comes with a Personal account, and the ability to create multiple Early accounts for each of your children. To set up an Early account, you only need your child’s name, birthdate, and social security number.
Acorns is a robo-advisor, or an automated investment service that builds your portfolio by investing in exchange-traded funds (ETFs) according to your selected financial goals. You can contribute funds directly to an Early account by setting up daily, weekly, or monthly recurring investments. You can also link your spending accounts to the app and contribute round-ups. (Any time you make a purchase, Acorns will round up the amount to the nearest dollar, diverting the remainder into your Acorns portfolio).
- Easy account set-up and use
- Family and friends can gift contributions to Early accounts.
- Earn bonus savings and investments when you shop through the Acorns app.
- It could take a while for a substantial amount of money to accumulate
- Assets might affect future eligibility for grants or financial aid
Price: $3 per month
Easily save & invest in the background of life. Invest your spare change, save for retirement, spend smarter, earn more, and grow your knowledge.
3. M1 Finance
Founded in 2015, M1 Finance is a robo-advisor investment platform that offers a line of credit, digital banking, and a cash-back rewards credit card—all from one platform. With an M1 investment account, you can integrate a checking account to transfer funds, set up direct deposit, and make purchases with a debit card.
- Allows you to purchase fractional shares
- Investment “pies” allow you to allocate a percentage to each of your stocks
- Visually helpful and easy to use the website and app
- You have to be an M1 Plus member ($125/year) to open a custodial account
- Limited stock selection
M1Finance Free automated investing. Create your own portfolio with any stock and/or ETF, for free. Users can also get access to lines of credit and high yield on their non-invested monies. Try M1Finance Today!
A major player in the retirement investment and mutual funds industries, Vanguard offers a variety of features with its custodial accounts. There are no maintenance, transfer, or enrollment fees. You can set up automatic transfers to your custodial account from your bank account or other Vanguard account. If you have a UTMA or UGMA account with another brokerage, you can move it to a Vanguard account (however, this transfer could be taxable).
With Vanguard, you get extensive investment options, including ETFs, stocks, bonds, and Vanguard and non-Vanguard mutual funds. Additionally, Vanguard is regarded highly for its low-cost index fund. All brokerage accounts have a $20 annual service fee, however, it can be waived if you sign up for e-delivery of your statements.
Vanguard also offers Personal Advisor Services which provides personalized financial advice, goal tracking, and ongoing financial advisor support. (Remember that for this service, you’ll need a minimum of $50,000 and will be responsible for a 0.30% annual fee). For beginner investors, you can find ample educational resources and tools on Vanguard’s website.
- Has been in business for 45+ years
- Offers low-cost index funds
- No fees
- Most Vanguard mutual funds require a $1,000 to $3,000 minimum investment
- Does not offer fractional shares
5. Ally Bank
What began in 1919 as GMAC, a financial institution with General Motors, in 2009 became Ally Financial, a reputable online bank, lender, and brokerage. It’s known as one of the original online banks, consistently ranked as one of the best.
Through Ally Invest, you can set up a self-directed trading account (where the account holder determines the investments) or a Robo Portfolio (where an automated platform determines investments based on your financial goals). Either way, you’ll have access to an array of investment options.
Alternatively, if you’d like a custodial account for savings (as opposed to investing), you could opt for a custodial Ally Online Savings Account. The savings account has an APY of 0.50% (about 9x the national average), no minimum balance, and no monthly maintenance fees.
- Option for a custodial online savings account (with 0.50% APY)
- Commission-free trading on stocks and ETFs
- 24/7 customer support (via phone, email, and chat)
- No physical branch locations
- Cannot deposit cash
6. Flyte (Formerly Loved)
Flyte, formerly known as Loved, is an easy-to-use trading platform that offers commission-free custodial accounts for kids under 18. To start with Flyte, you need $1 for an initial investment in the thousands of stocks and ETFs available. With no trading fees, you can also invest in several cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin. Portfolios are managed through the Flyte app available in the App Store and Google Play store.
Flyte was established to educate children in finance and investing to ensure they are just as invested in their financial future as their parents. Its investing account is ideal for teaching your child how money works, what investing is, the different assets available, and investing strategies. Additionally, you can set your child up with their own Flyte login; however, they cannot make trades or transfer money without parent or guardian approval
This company is unique in that it also provides a debit and savings account for your child. They will learn about saving and spending by creating a budget and savings goals. They can be issued their own debit card and Mastercard, and make in-store and online purchases. Parents can implement spending restrictions and control their child’s accounts through the Flyte app.
- No commission, trading, transfer, or maintenance fees
- Offers a savings and debit account
- Offers the ability to purchase fractional shares
- You can invest in several cryptocurrencies
- Limited information available on its website
- Limited investment options
- Young company with only 5 years in the industry
7. Fidelity Investments
With a Fidelity Investment custodial account, you can invest in stocks, ETFs, options, mutual funds, bonds, CDs, annuities, and IPOs. You can also purchase “slices” or fractional shares from over 7,000 stocks. There are no opening balance requirements or mutual fund transaction fees. All stock and ETF trades are commission-free.
Fidelity also offers perks to its account holders, such as Fidelity Viewpoints, an online resource for investing knowledge, and the Fidelity Planning and Guidance Center for help in reaching your investment goals.
In addition to its custodial account, Fidelity offers other investing opportunities for minors, such as a 529 college savings plan, a children’s Roth IRA, an Attainable Savings Plan (ABLE) for children with disabilities, and a Fidelity Youth Account. The Fidelity Youth Account is a brokerage account owned and managed by your 13–17-year-old. It comes with a comprehensive financial education library and a debit card so teens can put what they’ve learned into action.
- Fidelity Youth Account for teens 13 to 17 teaches money management and investing strategies
- Extensive financial literacy resources for kids
- Impressive customer service (24/7 phone, email, and live chat support and 200+ local branches)
- Cannot invest in cryptocurrencies
- Fidelity’s robo-advisor accounts do not support custodial accounts
Compare the Best Custodial Accounts
|Brokerage||Fees||Account Minimum||Investments||Key Features|
|Charles Schwab||$0||$0||ETFs, fixed income, futures, mutual funds, options trades, stocks||Schwab Stock “Slices” allow you to invest in fractional shares for as little as $5.|
|Acorns||$5/monthly for Family Plan||$0||ETFs (including stocks, bonds, real estate, and other assets)||Provides education and financial literacy content for families.|
|M1 Finance||$125/year for M1 Plus Membership||$0||EFTs, stocks, crypto||Investment “pies” allow you to allocate a percentage to each of your investments|
|Vanguard||$20 annual account service fee (which can be waived if you sign up to receive account documents via email).||$0 per trade ($3,000 for Vanguard Digital Advisor; $50,000 for Vanguard Personal Advisor Services)||ETFs, fixed income, forex, mutual funds, options trades, and stocks||Provides online resources, tools, and calculators; Offers personalized financial advice and goal tracking|
How Do Custodial Accounts Work?
Custodial accounts allow adults (the custodians) to open an investment account on behalf of a child (the beneficiary) that they can take control of when they become an adult.
Parents, grandparents, relatives, or guardians can open a custodial account and add money and other assets to help it grow.
Custodial accounts work like any other brokerage account. Adults manage the investments and can even withdraw funds, as long as the money is being used to benefit the minor.
The custodian is responsible for deciding how to invest the funds; however, the account ultimately belongs to the beneficiary.
The beneficiary cannot withdraw funds from the account until they have reached the age of majority (or legal adulthood), which ranges from 18 to 25, depending on your state. At that point, the beneficiary is in complete control of the account.
Alternatives to Custodial Accounts
If you’re looking for an account solely for college funds, you may want to consider a 529 or a Coverdell Education Savings Account (ESA).
529 College Savings Plans
A popular choice for parents, 529 college savings plans were designed to assist in paying for higher education expenses, such as tuition, room and board, and textbooks.
Whatever money you put in a 529 grows tax-free, and you won’t pay taxes when you make a withdrawal for qualified expenses (including those mentioned here).
Coverdell Education Savings Account
The Coverdell ESA is a tax-advantaged savings account that was created to help with K-12 and higher education expenses. Unlike the 529, there is an annual contribution limit of $2,000 per beneficiary.
Additionally, funds must be used for qualified expenses and withdrawn by the time the beneficiary turns 30. Otherwise, the account will face taxes and penalties.
Frequently Asked Questions
Do custodial accounts get taxed?
Similar to an adult’s brokerage account, custodial accounts do get taxed. For beneficiaries under the age of majority, the first $1,050 earned is tax-free. The next $1,050 earned is taxed at the child’s tax rate. Due to the “kiddie tax,” any minor’s unearned income above $2,300 will be taxed at the custodian’s marginal income tax rate. If the custodial account earns taxable income, the custodian must file a tax return and pay any taxes owed.
Parents, grandparents, relatives, and guardians can annually “gift” a child’s custodial account up to $16,000 tax-free (up to $32,000 for a couple). Anything over that amount would be subject to the gift tax.
When can you withdraw money from a custodial account?
Typically, money can be withdrawn from a custodial account at any time, as long as it is used to benefit the child. However, you should check with your brokerage for the specifics before you make any withdrawals.
What are the limitations of a custodial account?
Custodial accounts do have a few downsides to consider. First, the assets inside a custodial account are considered the minor’s property and could impact future eligibility for financial aid. Second, when the beneficiary becomes an adult, they will owe taxes on account gains. Finally, gifts and deposits to the custodial account are irrevocable. Once the beneficiary gets complete control of the account, they can spend it however they want.
Are Custodial Accounts a Good Idea?
A custodial account can be a great way to save money for your child’s future. However, you will want to consider all aspects of this type of account compared to its alternatives.
A custodial account is flexible in ways that a 529 and Coverdell ESA are not. There is no limit for contributions, unlike the ESA which maxes out at $2,000 per year.
Additionally, where a 529 will only allow funds to be used for educational purchases, money from a custodial account can be used on anything that benefits the child, such as clothes, books, or a new laptop.
If your child will need financial aid for college, you may want to consider a 529 instead. As the money and assets in a UGMA or UTMA account are considered your child’s, it can reduce your child’s financial aid eligibility by 20% of the assets’ value. (Ultimately, you could roll UGMA/UTMA assets from a custodial account into a 529 to avoid this).
Remember that once your child becomes an adult and gains control of the account, they can spend their money however they wish. If you have concerns about your child’s financial responsibility, you may want to look into other options.
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