Everything You Need to Know About Custodial Accounts

A custodial account is a great way to give a financial gift to a minor and teach them about investing. These accounts are set up and managed by an adult, then turned over when the recipient reaches adulthood. Learn more below to see if a custodial account is right for you.

Custodial Account Benefits

  • The money and assets legally belong to the minor, so the earnings are taxed at the minor’s (lower) tax rate.
  • Opening a custodial account for a minor is a great way to teach a child about saving and investing.
  • Custodial accounts offer similar wealth transfer benefits as a trust account with significantly less legal complication.

Custodial Account Limitations

  • Any money that the adult contributor deposits into the custodial account becomes property of the minor and can only be used by the minor.
  • Once contributed to one child's account, the money must remain in that child's account rather than being transferred between children's custodial accounts.
  • Any adult can contribute to a child's custodial account. The custodian is the only individual with control over how the money is invested.

Additional Information

  • Custodial accounts tend to invest in more conservative assets such as mutual funds, bonds, or stocks.
  • Assets in custodial accounts are legally the child's, meaning they can weigh heavily in considerations for the Free Application for Federal Student Aid (FAFSA).
  • Adults can make unlimited contributions into a custodial account. Contributions over $15,000 may face a gift tax.