Deposit vs Custodial Account: A Comprehensive Guide

A deposit account is a type of savings account that allows you to earn interest on your deposited funds, but you'll need to be at least 18 years old to open one.

You can open a deposit account at a bank or credit union, and you'll typically need to provide identification and proof of address to do so.

Custodial accounts, on the other hand, are designed for minors and can be opened with the help of a parent or guardian.

A custodial account can be a great way to save for a child's education or other future expenses, and it's often a good option for families who want to start saving early.

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A deposit or custodial account is a type of savings account controlled by an adult on behalf of a minor, also known as a beneficiary. This account can be opened through a financial institution, mutual fund company, or brokerage business.

The custodian, a responsible individual, manages the account and makes decisions on behalf of the beneficiary. A typical example of a custodial account is an employer-based retirement account managed by a plan administrator for qualified employees.

A custodial account can be maintained by a financial institution such as a bank, mutual fund, insurance company, non-banking financial institution, or stockbroker. The account is mainly for the benefit of the beneficiary.

Some common types of custodial accounts include Uniform Transfers to Minor Act Accounts (UTMA) and Uniform Gifts to Minor Act Accounts (UGMA). These accounts allow the custodian to invest on behalf of the beneficiary.

Here are some key characteristics of custodial accounts:

There are two main 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, while the UGMA is allowed in all 50 states.

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A UTMA account can hold a wide range of assets, including real estate, intellectual property, and works of art. However, it is limited to financial assets such as cash, securities, annuities, and insurance policies.

Any adult resident of the U.S. can open or contribute to an UGMA or UTMA account, and the custodian named on the account and the person making the gift or transfer can be the same person, but don't have to be.

The custodian, usually the child's parent or guardian, manages the account and makes decisions on behalf of the minor. The account is held and reported under the minor's Social Security number (SSN), and the investment earnings are taxed as the minor's income.

In either type of custodial account, you set up the account in the minor's name and specify the designated custodian. Initial investments, minimum account balances, and interest rates vary by the company that houses the account.

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Custodial accounts offer tax advantages compared to noncustodial accounts. They also have 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.

One of the main benefits of custodial accounts is their flexibility. There are no limits on the dollar amount of gifts or transfers that can be made, except for amounts above $18,000 per year ($36,000 for a married couple filing jointly) which will incur federal gift tax.

Here are some key benefits of custodial accounts:

Establishing a custodial account is simpler and less expensive than setting up a trust fund. The funds are turned over to the minor when they reach adulthood, and the minor has full control of the assets.

Custodial accounts offer a range of benefits that make them an attractive option for parents and guardians.

One of the biggest advantages of custodial accounts is their flexibility. There are no limits on the custodian's eligibility to contribute based on their income, and no contribution limits either. This means you can contribute as much as you want to the account without worrying about exceeding a certain threshold.

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You can use the funds in the account for a wide range of purposes, from providing a place to live to paying for clothing, as long as the beneficiary receives a benefit. This is in contrast to college savings plans, which are limited to educational expenses.

Custodial accounts are also relatively simple and inexpensive to establish compared to trust funds. In fact, the aim of the UGMA and UTMA regulations was to allow adults to transfer assets to minors without the need to establish a special trust.

Here are some key benefits of custodial accounts:

Overall, custodial accounts offer a lot of flexibility and benefits that make them a popular choice for parents and guardians.

Custodial accounts can hurt a child's financial aid prospects because the holdings count as assets, reducing their eligibility for college financial aid.

You might be wondering why this is a disadvantage. In short, it's because the account is considered an asset owned by the minor, which can negatively impact their ability to access financial aid.

Any deposits or gifts made to the custodial account are irrevocable, meaning they can't be changed or reversed. This can be a problem if you need to withdraw funds for other purposes.

Here are the key disadvantages of custodial accounts:

In some cases, you might need to liquidate non-cash investments in the custodial account to transfer education funds to an eligible 529 plan. This can be a hassle, to say the least.

The IRS considers the minor child the owner of a custodial 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.

Custodial accounts are not as tax-exempt as other types of accounts, but the custodian can move money to an eligible 529 plan to reduce the tax impact.

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Contributions for custodial accounts are made with after-tax dollars, and the first $1,300 of unearned income is tax-free in 2024.

The tax-free amount increases to $1,350 in 2025, and income above $3,150 is taxed at the parent's rate.

Withdrawals from a Coverdell ESA can be tax-free, provided they do not exceed the beneficiary's qualified education expenses.

The account's flexibility is a significant advantage, but it also has a downside: the risk that the account will limit the amount the child can receive in financial aid from a college.

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Opening a custodial account is a straightforward process. Any adult resident of the U.S. can open or contribute to an UGMA or UTMA account.

To open a custodial account, you can approach a financial institution, mutual fund company, or brokerage business. You'll need to provide necessary details like social security number, address, and contact information.

The initial deposit can be done by cash, check, or other transfer methods. The custodian can fund the account through regular deposits or transfers from another account.

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Here are the steps to open a custodial account:

Once established, a custodial account functions like any other account at a bank or brokerage. The custodian—a designated manager or investment advisor—decides how to invest the money.

To open a custodial account, you'll need to provide necessary details like your social security number, address, and contact information.

You can fund the account with an initial deposit made by cash, check, or other transfer methods. The custodian can also make regular deposits or transfers from another account.

A custodial account functions like any other account at a bank or brokerage, with the custodian deciding how to invest the money.

The account manager or other entities can continue contributing to the fund, and custodial accounts can invest in a variety of assets, including cryptocurrency. However, financial institutions generally do not allow the manager to use the account to trade on margin or buy futures, derivatives, or other highly speculative investments.

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You can invest funds in various assets, but it depends on the financial institutions accepting the investment in a particular asset.

A custodial account becomes very important for opening a special fund for children or minors by providing their funds at the right time when they attain the majority.

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

The minor becomes the owner of the assets and distributions must be used for their benefit, and the donor/transferor gives up all rights to the assets.

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To open a custodial account, you can approach a financial institution, mutual fund company, or brokerage business. You'll need to provide necessary details like your social security number, address, and contact information.

You can open a custodial bank account with straightforward procedures, and the services are provided in exchange for a custodial account brokerage fee, similar to charges for other types of accounts.

To open an account online, you can visit the broker's website or go to their branch and request to open a bank account. Before opening a custodial bank account, it's essential to review the fees, payment and contribution structure, and interest rate.

Here are the steps to open a custodial account:

Most brokerages, including digital and brick-and-mortar options, offer custodial accounts. You can also open custodial deposit and checking accounts at most bank branches.

A Vanguard UGMA/UTMA offers a broad lineup of investment options, including Vanguard mutual funds, stocks, bonds, non-Vanguard mutual funds, and ETFs. There are no enrollment, transfer, or advisor fees for self-directed clients.

If you're looking to give a minor investments or cash, you may want to consider opening a custodial account. Assets in this account can only be used to benefit the minor who is the account owner and can be used in different ways.

You can transfer money from a custodial account, but once the gift is made, the donor/transferor gives up all rights to the assets, and the minor becomes the owner.

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We researched 10 companies offering custodial accounts and evaluated each on minimum opening deposit as well as fees, including account maintenance fees, transfer fees, and enrollment fees. This thorough evaluation helped us identify the best options for our readers.

Account maintenance fees can be a significant expense, and we looked for companies that kept these fees low. According to the FINRA Reminds Member Firms of Their Responsibilities for Supervising UTMA and UGMA Accounts, account maintenance fees can range from $0 to $100 per year.

Customer service is also crucial when managing a custodial account. We considered companies with strong customer service and easy-to-use platforms, such as Merrill Edge's custodial accounts, which are designed to be easy to use.

Financial literacy is essential for adults and children who will be taking control of their custodial accounts. We prioritized companies with strong educational resources, including the Internal Revenue Service's Publication 970, Tax Benefits for Education, which provides valuable information on tax benefits for education.

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Here's a summary of the key factors we considered when evaluating custodial accounts: