What Is a Custodial Account?
In plain English
A custodial account is a financial account opened and managed by an adult (the custodian) for the benefit of a minor (the beneficiary). The custodian controls the account until the minor reaches the age of majority — typically 18 or 21 depending on the state. The assets legally belong to the minor and must be used for their benefit. The two main types are UGMA and UTMA accounts.
What Is the Difference Between UGMA and UTMA Accounts?
UGMA (Uniform Gifts to Minors Act) accounts can hold financial assets like cash, stocks, and bonds. UTMA (Uniform Transfers to Minors Act) accounts can hold those same assets plus real estate, patents, and other property types. UTMA accounts are available in most states and offer more flexibility. Both types transfer full ownership to the minor at the age of majority.
How Are Custodial Accounts Taxed?
Custodial account earnings are taxed under the kiddie tax rules. The first portion of a minor's unearned income (around $1,250) is tax-free, the next portion is taxed at the child's rate, and amounts above that threshold are taxed at the parent's marginal rate. The specific thresholds are adjusted annually. These accounts do not offer the same tax advantages as 529 plans.
How Do Custodial Accounts Affect Financial Aid?
Custodial accounts are considered the student's asset on the FAFSA, which means they are assessed at a rate of up to 20% — significantly higher than parent-owned assets at 5.64%. A large custodial account balance can reduce financial aid eligibility. Some families deplete or convert custodial accounts before the student reaches college age for this reason.
Frequently asked questions
Can the minor access the custodial account before reaching adulthood?
The custodian controls all transactions until the minor reaches the age of majority. The custodian can make withdrawals, but funds must be used for the minor's benefit. Once the minor reaches the transfer age, they gain full unrestricted control of all assets.
Can you take money back from a custodial account?
No. Contributions to a custodial account are irrevocable gifts to the minor. The custodian can manage and spend the funds, but only for the minor's benefit. You cannot reclaim the money or redirect it to another beneficiary.
Keep exploring
Related terms
Trust Account
A trust account is a bank account held by a trustee for the benefit of another person or entity, commonly used for estate planning and asset protection.
Savings Account
A savings account is a deposit account that earns interest on your balance while keeping your money accessible for withdrawals.
Joint Account
A joint account is a bank account shared by two or more people, where each owner has equal access to deposit, withdraw, and manage funds.