Custodial Account vs UTMA: A Comprehensive Comparison

A custodial account and a Uniform Transfers to Minors Act (UTMA) account may seem like similar options for managing a child's finances, but they have some key differences.

The main benefit of a custodial account is that it allows a minor to earn interest on their savings, which can add up over time.

Unlike a UTMA account, a custodial account requires the child to reach the age of majority, typically 18 or 21, to take control of the funds.

A custodial account is a savings or investment account managed by an adult for a minor until they reach the age of majority. That age varies from 18 to 21, depending on the state.

The custodian, typically a parent or guardian, decides how to invest the money and can continue contributing to the fund.

A custodial account functions like any other account at a bank or brokerage, allowing the manager to invest in a variety of assets, including stocks, bonds, and mutual funds.

Once the minor reaches the age of majority, control of the account is officially transferred to the named beneficiary from the custodian.

The account can be restricted once the child passes the state-mandated age and control has not been transferred, although this is typically a mandatory process initiated by the custodian.

At Fidelity, the account will be restricted once the child reaches a certain age (between 18 and 25, depending on the state) and control has not been transferred, and the custodian will be notified by Fidelity when the transfer needs to be initiated.

Anyone can contribute to a custodial account with no contribution limits, making them valuable gift opportunities for major milestones and celebrations.

Up to $18,000 can be contributed to a custodial account free of gift tax in 2024, and up to $36,000 for a married couple.

There are two types of custodial accounts: the Uniform Transfers to Minors Act (UTMA) and the Uniform Gift to Minors Act (UGMA). The UTMA is allowed in all states except Vermont and South Carolina.

The UGMA is allowed in all 50 states, making it a more widely available option. A UTMA account can hold virtually any kind of asset, including real estate, intellectual property, and works of art.

UTMA accounts are limited to financial assets such as cash, securities (stocks, bonds, mutual funds), annuities, and insurance policies. In either type of custodial account, you set up the account in the minor's name.

You also specify the designated custodian—usually the child's parent or guardian. Initial investments, minimum account balances, and interest rates vary by the company that houses the account.

There are also many other types of custodial accounts, including retirement accounts and tax-advantaged education accounts like 529 college savings plans and Coverdell education savings accounts.

Custodial accounts offer tax advantages compared to noncustodial accounts.

One of the biggest benefits of custodial accounts is their flexibility - there are no limits on the custodian's eligibility to contribute based on their income, no contribution limits, and no requirements to make regular distributions.

A custodial account is much simpler and less expensive to establish than a trust fund, making it a more accessible option for many families.

However, a minor's ownership of the custodial account can reduce their financial aid eligibility when they apply for college, as the holdings count as assets.

Any deposits or gifts made to the account are irrevocable, meaning they can't be changed or reversed, and all the account's holdings pass to the minor at the age of majority.

This can be a drawback for families who want to maintain control over the funds or change the beneficiary of the account.

Custodial accounts offer tax advantages compared to noncustodial accounts.

However, there's a catch: a custodial account can limit the amount a child can receive in financial aid from a college because it's considered an asset owned by the minor.

Custodial accounts have enormous flexibility, with no limits on the custodian's eligibility to contribute based on their income, no contribution limits, and no requirements to make regular distributions.

You can use the funds for anything that benefits the minor, not just educational costs.

Setting up a custodial account is simpler and less expensive than establishing a trust fund.

Any deposits or gifts made to the account are irrevocable, meaning they can't be changed or reversed.

The account's holdings pass to the minor at the age of majority, with no way to alter the beneficiary or reverse gifts or contributions.

Custodial accounts aren't as tax-sheltered as other accounts, which can lead to a bigger tax bill.

To mitigate the tax bite, you can transfer education funds to an eligible 529 plan, but you'll need to liquidate any non-cash investments first.

One of the biggest advantages of UGMA and UTMA accounts is the flexibility in how the funds can be used. You can use the funds for anything you want, not just educational expenses.

In contrast to 529 plans, which have strict rules about how the funds can be used, UGMA and UTMA accounts offer more freedom. This can be a huge relief if your child has unexpected expenses or needs.

You can even use the funds to pay for expenses that benefit your child, such as school clothes or summer programs, while they're still a minor.

Custodial accounts have some tax advantages, known as the kiddie tax, which can benefit minor children. For 2025, the first $1,350 of unearned income is tax-free.

The IRS considers the minor child the owner of the account, so the earnings are taxed at the child's tax rate up to a certain point. This can lead to significant tax savings for families.

You can contribute up to $19,000 for the 2025 tax year to a custodial account without incurring the federal gift tax. This is an increase from $18,000 in 2024.

UTMA and UGMA accounts, on the other hand, do not offer the same tax benefits as custodial accounts. You make contributions with after-tax dollars to these accounts.

The tax advantages of custodial accounts are a big perk. The IRS considers the minor child the owner of the account, so the earnings are taxed at the child's tax rate up to a certain point.

For 2025, the first $1,350 of unearned income is tax-free, and income over $1,350 is subject to the child's tax rate. This is up from $1,300 of unearned income tax-free and income over $1,300 subject to taxation in 2024.

You can contribute up to $19,000 for the 2025 tax year without incurring the federal gift tax. This is an increase from the $18,000 limit for 2024.

The kiddie tax is a benefit that allows children under 19 years old or 24 for full-time students to pay taxes at a lower rate on unearned income.

If you're considering opening a custodial account to help pay for a child's education, you should know that it may affect their financial aid eligibility by 20% of the asset value.

UTMA and UGMA accounts are considered assets that belong to the minor, whereas 529 college savings plans are considered assets belonging to the parent.

This difference in ownership can significantly impact the amount of financial aid a child is eligible for, with UTMA and UGMA accounts reducing aid by 20% of the asset value, compared to 529 plans reducing aid by up to 5.64% of the asset value.

Custodial accounts are considered less favorable for financial aid purposes compared to 529 college savings plans.

Parents usually report 529 plans as an asset, which reduces aid by up to 5.64% of the asset value, whereas custodial accounts are reported as a child's asset, reducing financial aid eligibility by 20% of the asset value.

It's essential to consider the financial aid implications when choosing between a custodial account and a 529 plan.