Utma Custodial Account: A Comprehensive Guide

A UTMA custodial account is a type of account that allows adults to manage finances for minors.

You can open a UTMA account for a minor as young as a few days old, and there is no upper age limit for the minor.

The adult in charge of the account is called the custodian, and they have the power to make financial decisions for the minor.

The custodian's role is to manage the account in the best interest of the minor, and they must follow the laws and regulations that govern UTMA accounts.

A UGMA custodial account is a taxable investment account set up to benefit a minor but controlled by an adult custodian until the minor reaches the age of majority.

The custodian invests and manages the account, but the minor is the owner and is responsible for paying taxes on any investment income earned.

Only the minor can use or benefit from the account, and it's considered irrevocable property of the minor.

A custodian opens a UTMA account and contributes to it on behalf of a minor beneficiary. The custodian manages the account until the minor comes of age.

The custodian is responsible for managing the UTMA account and its investments, similar to a trustee managing a trust. The custodian can be the donor, another adult, or a financial institution.

The 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.

Here are some common assets that a UTMA account can hold:

To open a custodial account, you can apply online with many online brokers and financial institutions.

You'll need the child's name and information, along with a custodian, an adult 18 years or older who will control the account until the child reaches the age of majority.

We researched 10 companies offering custodial accounts, evaluating each on minimum opening deposit, fees, and other factors.

We considered the company's history, customer service, and ease of use of their websites or apps.

Our review prioritized companies with low fees, strong educational resources for adults and children, as well as convenient and easy-to-use platforms.

We looked at the educational resources provided by the different companies, recognizing the importance of financial literacy for adults and their children.

The Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) are both relevant to custodial accounts, and our research took these into account.

Here's a breakdown of the factors we considered:

We also considered the company's history and customer service, as well as the educational resources provided.

Custodial accounts offer enormous flexibility, with no limits on the custodian's eligibility to contribute based on their income.

For example, there are no contribution limits, and no requirements to make regular distributions at any point. This means you can contribute as much as you want, whenever you want, without penalty.

A custodial account is much simpler and less expensive to establish than a trust fund. The aim of both UGMA and UTMA regulations was to allow adults to transfer assets to minors without the need to establish a special trust.

The tax advantages of custodial accounts are significant, especially with the kiddie tax. 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 can result in a lower tax bill for your child.

Not everyone ends up attending college, and that's okay. A custodial account like a UGMA or UTMA account helps a minor save and invest while providing flexibility for their future.

The custodian handles and invests the account assets in the best interest of the beneficiary without needing to hire an estate-planning attorney or draw up legal documents. This can be a huge relief for parents who want to provide for their children without the hassle of setting up a trust.

A UGMA account is a taxable investment account set up to benefit a minor, but controlled by an adult custodian until the minor reaches the age of majority.

The custodian of a UGMA account invests and manages the account, but the minor is responsible for paying taxes on any investment income earned.

The first $1,300 of income from a UGMA account is free from tax, but taxes might be owed at either the child's or guardian's tax rate for income above that level.

Not everyone needs to save for college, and a UGMA account provides flexibility for a minor to save and invest for various goals.

The custodian handles and invests the account assets in the best interest of the beneficiary, without needing to hire an estate-planning attorney or draw up legal documents.

You can withdraw money from a UTMA custodial account, but only for the benefit of the minor.

The term "for the benefit of the minor" is quite broad and can include educational costs.

Money can be withdrawn from a UTMA account as long as it's used for the benefit of the minor, a vague term that includes, but isn't limited to, educational costs.

This means you can use the money to pay for the minor's tuition, books, or other educational expenses.

You can withdraw money from a UTMA account for the minor's benefit, but be aware that the account is intended to provide for the minor's needs, not to accumulate wealth.

UTMA custodial accounts can have a significant impact on a child's financial aid eligibility, especially when it comes to college funding.

The Free Application for Federal Student Aid (FAFSA) considers UTMA accounts as assets belonging to the minor, which can negatively affect financial aid eligibility.

This means that if you're considering opening a UTMA account to help pay for your child's education, you should be aware of the potential impact on their financial aid prospects.

Custodial 529 plans and ESAs, on the other hand, are considered assets belonging to the parent, which reduces the child's financial aid eligibility by a maximum of 5.64% of the account balance.

Here's a comparison of how different types of accounts are treated by the FAFSA:

This can be a significant consideration, especially if you're planning to use the account to help fund your child's education.

A utma custodial account can be set up by anyone, but it's most commonly created by grandparents or other relatives for a minor's benefit.

The account can be opened at most banks and financial institutions, with some having more convenient online setup processes than others.

The funds in a utma account belong to the minor until they reach the age of majority, which varies by state but is typically 18 or 21.

For example, if you set up a utma account for your grandchild, you'll have control over the funds until they turn 18, at which point they'll take full ownership.

UGMA vs. UTMA: What's the difference?

UGMA came first and is valid in all 50 U.S. states.

It allows gifts of cash or securities to be given to minors without tax implications up to gift tax limits.

UTMA came after and expanded gifts to include property and other transfers for those states that have adopted it.

All U.S. states except South Carolina and Vermont have adopted UTMA.

Here's a quick comparison of the two:

You can open a custodial account at most brokerages, digital or brick-and-mortar, with no annual account fees or minimum investment amounts.

Many brokerages, like Merrill Edge, offer online setup for UGMA/UTMA custodial accounts, allowing you to transfer funds directly from a checking or savings account.

You can also open custodial deposit and checking accounts at most bank branches.

Some brokerages, such as Merrill Edge, allow you to transfer funds directly from a Bank of America account, their parent company.

These accounts are typically set up to benefit a minor, but are controlled by an adult custodian until the minor reaches the age of majority.

A custodial account can be a great way to save for a child's future, but it's essential to consider the tax implications. There are tax advantages to a custodial account, which can be beneficial for the child's financial growth.

The adult who opens the account is responsible for managing it, including making investment decisions and deciding how the money is to be used. This can be a significant responsibility, so it's crucial to weigh the pros and cons before making a decision.

A custodial account can limit the amount of financial aid a child might get for college, so it's essential to consider this factor when deciding whether to open one.