A custodial account is a popular way for parents and guardians to invest for their children’s future. Accounts are easy to set up and manage, and the adult custodian can choose from a wide range of investment options.
What is a custodial account?
A custodial account is an investment account for children and teens offered by brokers. Adults, usually parents, make contributions to the account on behalf of the child until the child reaches the age of maturity as set by state law.
The term custodial account typically refers to uniform transfer to minors accounts (UTMA) and uniform gift to minors accounts (UGMA). Each state manages its own UTMA/UGMA program.
The adult who opens the account, known as the custodian, has broad discretion over how the account is invested and managed. The custodian can buy and sell securities, reinvest dividends and make withdrawals for the minor’s benefit. Once the child reaches the age of maturity, he or she gains control of the account and its assets.
Best custodial investment accounts of 2024
Brokers who made our list provide access to a diverse range of investment assets, low fees and account minimums, easy-to-use interfaces and educational resources to help you grow your investing knowledge.
To determine the best custodial accounts, we considered factors such as minimum deposit requirements, maintenance fees and commissions for online stock and ETF trades, among other factors.
Fidelity
Fidelity, which earned top marks in Bankrate’s comprehensive review of brokers, offers a standout custodial account. A full-service broker known for its exceptional customer service, extensive research resources and wide range of investment options, Fidelity offers UTMA/UGMA custodial accounts on par with its other stellar services.
Fidelity’s custodial account provides access to stocks, bonds, mutual funds, ETFs, options, CDs and fractional shares. With no minimum opening deposit or recurring maintenance fees, it’s a low-barrier entry point for starting a child’s investment journey.
Fidelity offers other investment account options as well, including a Roth IRA for kids and a Youth Account for teens age 13-17. The latter gives a teen full control over their investments before they turn 18 with no fees or minimum balance requirements.
Charles Schwab
Charles Schwab, a pioneer in the discount brokerage industry, has built a reputation for top-notch customer service, a wide range of investment options and minimal fees.
The Schwab One Custodial Account offers the same key features as the company’s flagship Schwab One Brokerage Account: Zero commissions for buying and selling stocks and ETFs, no minimum opening deposit and no maintenance fees. Account holders have access to first-class customer service, hundreds of nationwide office locations and a variety of investment tools.
Fractional shares of S&P 500 companies starting at $5 is another great feature, making Schwab an excellent choice for an affordable custodial account.
Schwab Intelligent Portfolios, the company’s robo-advisor services that create and manage a diversified portfolio, supports custodial accounts. However, the minimum balance is $5,000 to open an Intelligent Portfolio account, so if you’re starting with less, the Schwab One Custodial Account is the way to go.
Merrill Edge
Merrill Edge’s custodial account offers a fee-free and accessible way to start saving for a child’s future.
With no minimum account requirements, $0 commissions for stock and ETF trades and $0.65 options contracts, Merrill Edge is an attractive option, especially for Bank of America customers who can benefit from its extensive network of physical locations. While fractional share investing isn’t available for stock purchases, it offers dividend reinvestment.
E-Trade
E-Trade’s custodial account offers commission-free trading for stocks and ETFs, with a $0.50 to $0.65 contract fee for options.
To automate the process, you can open an account using the E-Trade Core Portfolios robo-advisor service, which creates and manages the portfolio for you for a low annual fee of 0.30 percent of assets under management and a $500 minimum to get started. The custodial account also comes with a free debit card, checking and bill pay. Like all custodial accounts, you can make withdrawals for any purpose without penalties so long as it benefits the minor beneficiary.
E-Trade also offers a Coverdell education savings account and an IRA for minors.
Vanguard
Vanguard, famous for its low-cost investment options, is an excellent choice for an equally low-cost custodial account. The broker boasts no enrollment, transfer or advisor fees for its self-directed custodial accounts.
Account holders can invest in Vanguard’s entire fund lineup, including index funds, actively managed funds and ETFs fee-free with no commissions. Beyond Vanguard funds, you can invest in individual stocks and bonds, although fractional shares are not available.
Acorns
Acorns, an investment app designed for simplicity and accessibility, offers a comprehensive financial platform that includes a custodial account, known as Acorns Early.
Available under the Acorns Gold service tier ($12 per month), Acorns Early is easy to set up and allows for multiple children’s accounts without additional fees. It takes just $5 to open an account. You can also set up recurring “round-up” deposit contributions by linking a checking account. The fintech app is also offering a 1 percent match for parents who contribute to their child’s custodial account.
While it’s nice that Acorns automatically places you into a diversified portfolio of ETFs for the account, there are other brokers on this list that provide the same robo-service without a monthly fee. However, Acorns maintains the lowest minimum investment for an automated custodial account.
How does a custodial account work?
Custodial accounts function like regular brokerage accounts, allowing custodians to buy and sell stocks, bonds, funds and other investments. Anyone can contribute to a custodian account.
Custodial accounts are typically managed by parents or guardians, who contribute to the account and make investment decisions.
There are no income or contribution limits for these accounts. However, contributions above $18,000 per year in 2024 ($36,000 for a married couple filing jointly) can incur federal gift tax.
Unlike college savings plans, there are no penalties if assets in the account aren’t used to pay for education.
Custodians have full control over the account until the beneficiary reaches the age of majority, which is at least age 18 but is often age 21, depending on the state. At that point, the custodian is required to transfer assets to the beneficiary.
The account and its assets are irrevocable and legally belong to the minor. This means the minor is responsible for paying taxes on any investment income earned. Contributions aren’t tax-deductible for the custodian.
If you’re looking to invest for a child’s future, it’s also worth exploring the best 529 plans.
Bottom line
With no contribution limits, custodial accounts offer flexibility and convenience when transferring money to a minor. While they can be a valuable tool, consider alternative options like 529 plans if college savings is your primary goal. A 529 plan often provides tax benefits and may have less impact on your child’s eligibility for college financial aid.
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