The ultimate tool for understanding custodial accounts: Benefits and setup guide

Helping your kids or grandkids with education costs can be one of the most impactful investments you can make in their future. Establishing a dedicated college savings account can be a great way to show your commitment to their long-term success. While 529 college savings plans are a popular tool to invest on a child's behalf, custodial accounts are another option to consider.

The most common types of custodial accounts are Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) investment accounts. While they work similarly, there are important differences in investment options, taxes and control rules.

This guide explains the ins and outs of UGMA and UTMA custodial accounts clearly and concisely, including tax rules for 2026, age-of-majority requirements, pros and cons and how they compare to college savings plans.

These types of custodial accounts allow adults to invest money for a child while the child legally owns the assets. They’re commonly used by parents and grandparents who want to help fund a child’s future, whether that’s college, a first car or other expenses. The child beneficiary gains control of the accounts when they reach the legal age of majority as determined by state law, typically 18 or 21.

The federal laws that govern UGMA and UTMA accounts contain specific rules about how they operate. Here are some of the basic guidelines to know when you're creating or contributing to one of these accounts:

Any adult can open a UGMA or UTMA account at any bank, brokerage firm or mutual fund company that offers them. They'll need to specify a beneficiary (a minor) as well as a custodian for the account.

Anyone can contribute to a UGMA or UTMA account and there's no annual limit on the amount. You can start investing with as little as $50 per month. Contributions greater than $19,000 in 2026 from an individual (or $38,000 for married couples) will count against their lifetime gift tax exemption.

The custodian manages the account, including making investment choices, even though the child owns the assets and the custodian can only withdraw funds if doing so directly benefits the child. The custodian also must transfer control of the account to the child beneficiary when they reach legal age of majority, according to state law where the UGMA or UTMA account was created. Typically, it's age 18 or 21, although in some states and situations, custodianship can be extended up to age 25 or 30.

The biggest difference between UGMA and UTMA accounts is the investment options used in them. UGMAs are limited to simpler investment accounts, while UTMAs allow a wider range of asset transfers.

UGMA accounts can hold financial assets, such as cash, stocks, bonds, mutual funds and exchange-traded funds (ETFs). UTMA accounts can hold both financial assets and physical assets, such as art, jewelry or real estate. UTMA accounts also allow other transfers, such as payment of debts owed by a third party to a minor and transfers of property from trusts or estates.

While both custodial accounts were created by federal legislation, another key distinction is that individual states can choose whether to adopt them and the UTMA age of majority. Currently, Vermont and South Carolina have not adopted UTMA accounts.

Opening a custodial investment account for a child is straightforward and usually can be completed online in minutes. Here's how to get started with Thrivent.

Step 1: Choose your account type. Thrivent offers UGMA/UTMA custodial accounts, which allow investments in stocks, ETFs, mutual funds and bonds.

Step 2: Gather the required information. You'll need identification details for both the custodian and the minor — including names, Social Security numbers, dates of birth and contact information. Investment income is reported under the child's Social Security number.

Step 3: Complete the application. Open a new custodial account with Thrivent by entering information for both the adult custodian and the minor.

Step 4: Fund the account. Add money through a bank transfer, check or wire. Contributions are irrevocable gifts to the child, meaning the funds legally belong to them once deposited.

Step 5: Start investing. Once the account is funded, you can begin investing in assets such as index funds, ETFs or stocks. As custodian, you'll manage the portfolio on the child's behalf until ownership transfers to them at age of majority.

When money or assets are placed into a UGMA or UTMA custodial account, the transfer is treated as an irrevocable gift to the minor, meaning that any contribution to the account becomes a permanent gift to the child. Here are some key points.

• The gift cannot be taken back. Once funds are deposited, the donor permanently relinquishes ownership.
• The child immediately becomes the legal owner. Even though they cannot manage the account directly, the assets legally belong to them.
• The custodian only manages the assets. A parent or adult custodian controls investment decisions and withdrawals until the child reaches the state’s age of majority.

In custodial accounts, ownership and control are intentionally separated.

At the UTMA or UGMA age of majority, the custodianship automatically ends. At that point the account must be transferred to the child who can use the money for any purpose, not just education.

• Most states: age 21
• Some states: age 18
• Louisiana: age 22
• Certain states allow extension to age 25 under UTMA rules

UGMA and UTMA accounts are taxable investment accounts, meaning interest, dividends and realized capital gains generated in the account are reported as the child’s income each year.

However, the IRS applies the “kiddie tax” rules to prevent families from shifting investment income to a child’s lower tax bracket. These rules typically apply to children under 18, or full-time students under age 24 who depend on parental support.

Funding a custodial account is treated as a completed gift to the child.

• $19,000 per year (2026) can be gifted to each child without filing a gift tax return
• Married couples can give $38,000 jointly

Amounts above this limit typically require filing a gift tax return (Form 709), though actual tax is rare unless lifetime exemption limits are exceeded.

Because UGMA and UTMA accounts are taxed annually, when income is realized can affect the tax bill. Common planning considerations include:

• Managing annual investment income: Keeping dividends and realized gains under the kiddie-tax threshold can reduce taxes
• Capital-gain timing: Selling investments in lower-income years may allow gains to be taxed at the child’s lower rate
• Tax-efficient investments: Growth-focused investments that generate fewer distributions can reduce yearly taxable income
• Parent reporting option: Parents may report a child’s investment income on their own return in limited cases if the child’s income remains relatively low

With college costs representing a major financial hurdle for many families, 529 education plans are a common way that parents can help save for their children.

When comparing 529 plans and UGMA/UTMA accounts, several key factors can affect which option makes the most sense for your goals. These include contribution rules, tax treatment, investment flexibility and financial aid impact.

While both account types allow you to save and invest for a child, they differ significantly in how contributions are limited, how earnings are taxed, the range of available investments and how the assets are treated when calculating college financial aid.

• Neither 529 plans nor custodial accounts (UGMA/UTMA) have annual contribution limits
• Contributions count toward the annual gift tax exclusion:
  
  • $19,000 per individual
  • $38,000 for married couples (2026)
• Amounts above the exclusion count toward the lifetime gift tax exemption 
• 529 plans have total lifetime contribution caps set by states (roughly $235,000–$575,000)
• Custodial accounts do not have lifetime contribution limits

• 529 plans
  
  • Investments grow tax-deferred
  • Withdrawals for qualified education expenses are tax-free federally and usually at the state level
  • Some states offer tax deductions or credits for contributions
• Custodial accounts
  
  • Investment earnings are taxable each year
  • Dividends and interest may generate taxes even if assets aren’t sold
  • The kiddie tax may apply to a portion of earnings

• 529 plans
  
  • Limited investment menus
  • Often include mutual funds, ETFs and age-based portfolios that become more conservative over time
• Custodial accounts
  
  • Broader investment flexibility
  • Can include individual stocks, bonds, funds and in some cases collectibles or property (UTMA)

• 529 plans (parent-owned)
  
  • Minimal effect on financial aid
  • About 5.64% of assets counted in federal aid calculations
• Custodial accounts (UGMA/UTMA)
  
  • Treated as student assets
  • Can reduce financial aid eligibility by up to 20% of the account value
    

Custodial accounts are widely used for gifting investments to children because they are simple to set up and offer broad investment flexibility. However, they also come with trade-offs related to tax treatment, financial aid impact and loss of control once the child becomes an adult.

A custodial account may be a good choice if you want:

• Flexible savings beyond education
• Investment gifts from relatives
• A way to teach children about investing
• A long-term investment vehicle for a child