What parents need to know about custodial accounts

As a parent, you want to set up your child for success. And with that comes a desire to build their confidence and teach them life skills to help them thrive.

Financial skills are a big part of that—especially teaching financial literacy and emphasizing the stability that comes with long-term savings. Opening a custodial account can help you teach financial literacy, build long-term savings and transfer wealth efficiently to your child.

A custodial account is a financial account that an adult—typically a parent or grandparent—opens on behalf of a minor child. These accounts exist because minors can't legally open accounts for themselves. An adult must be on the account with them. The adult responsible for overseeing and managing the account is the custodian.

Anyone can contribute to the custodial account—whether that's the custodian, the child or someone else. The type of custodial account determines how the account can be funded and what types of assets it can hold. Possibilities include gifts of cash, securities, real estate and tangible valuables as well as the child's earned income and investments purchased with that income.

Once you contribute to a custodial account it becomes an irrevocable gift that permanently belongs to the child and counts toward federal gift tax limits. The money belongs to the child, cannot be taken back and you cannot change the beneficiary. The child can’t engage in account transactions (such as withdrawing funds or purchasing investments) on their own before the age of majority.

As long as the child is a minor, the custodian controls the account. All account activity must be for the child's benefit. The custodian may want to keep a detailed transaction record in case questions arise about the use of funds.

When the child reaches the age of majority in their state (typically 18 or 21), the account ceases to be custodial and full control transfers to them, regardless of your preferences. The adult may need to notify the financial institution of this change, but they ultimately pass over full control of the account to their adult child.

A custodial account technically belongs to the child. Any income it earns is reported to the IRS under the child's Social Security number. Any unearned income may be taxed under the kiddie tax rules, which can cause part of it to be taxed at your rate instead of your child's.

Many types of accounts allow adults to transfer assets to minors and manage them on their behalf. In addition to using custodial checking and savings accounts to work on foundational financial concepts, you may want to consider these custodial investment savings options:

Laws in all 50 states allow for gifts of cash, securities and physical assets to minors through UTMA accounts. (A similar but more restrictive account called a UGMA, named after the Uniform Gifts to Minors Act, is no longer widely used.) The assets in a UTMA can be used for any purpose.

Opening a UTMA can help families manage estate or inheritance taxes while preserving assets for younger generations and teaching investment skills. UTMAs can also be advantageous for directly transferring securities without having to sell them first.

These accounts have no contribution limits. But gifts exceeding the annual gift tax exclusion ($19,000 per recipient in 2026) must be reported to the IRS and count toward the donor's lifetime gift tax exclusion limit ($15 million in 2026).

A Coverdell ESA can help families save for a child's K–12 or post-secondary educational expenses. You can use a Coverdell ESA alone, but with its low annual contribution limit of $2,000 per beneficiary (not per donor), it's often used to supplement other accounts, such as UTMAs and 529 plans.

Unlike UTMAs, Coverdells allow tax-deferred growth. Withdrawals aren't taxed when the money is spent on qualified educational expenses at an eligible institution. Individuals whose modified adjusted gross income exceeds annual IRS limits can't contribute to these accounts, however. For 2026, eligibility phases out between $95,000 and $110,000 for single taxpayers or $190,000 and $220,000 if married filing jointly.

If your child earns income, they can contribute to a custodial Roth IRA no matter how young they are. The limit for 2026 is $7,500 or 100% of earned income, whichever is less. You can invest the money in the account, and the growth isn't taxed.

You can withdraw contributions without penalty on behalf of your child at any time, or they can once they reach legal adulthood. They also can withdraw earnings free of taxes and penalties for any reason once they reach age 59½, or penalty-free (but not tax-free) before then for certain types of expenses, including:

• Eligible college expenses
• Qualified birth and adoption costs
• Unreimbursed medical expenses while they're unemployed
• Disability needs

UGMA and UTMA accounts function similarly, but they differ in what assets they can hold. UGMA accounts are limited to financial assets like cash, stocks, bonds and mutual funds. UTMA accounts can hold those same financial assets plus physical property such as real estate, art and jewelry.

All 50 states recognize UGMA accounts, while Vermont and South Carolina haven’t adopted UTMA accounts. Because UTMAs allow both financial and physical assets, they can offer more flexibility in how you can transfer wealth to your child—whether through investments, tangible property or a combination of both.

While custodial accounts can help you save for your child’s future, they’re not the only option—and they may not always be the best fit for educational savings.

Understanding how custodial accounts compare to other tax-advantaged education savings options can help you decide which account, or combination of accounts, best aligns with your family’s needs.

Because different college savings options are treated differently when it comes to financial aid assessment, it's important to weigh this factor if your child plans to apply for need-based financial aid. Federal financial aid formulas assess custodial accounts as student assets at 20% of their value, while parent-owned assets, like 529 plans, are just 5.64%

This difference can impact aid eligibility. For example, a custodial account with $10,000 could reduce financial aid by up to $2,000 annually, while the same amount in a parent-owned 529 plan may reduce aid by about $564.

If your priority is to maximize financial aid, you may want to use a 529 plan for the majority of your education savings. Then you could keep a smaller custodial account to teach your child investing and money management skills.

Custodial account earnings are subject to the kiddie tax rules, which limit families’ ability to shift investment income to a child’s lower tax bracket.

For example, if your child’s custodial account earns $4,000 in 2026, the first $1,350 is tax-free, the next $1,350 is taxed at your child’s rate, and the remaining $1,300 is taxed at your rate.

Contributions to custodial accounts are subject to federal gift tax rules, with amounts above $19,000 per person per year requiring reporting to the IRS.

Setting up a custodial account for your child can be a great idea at any age. The earlier you start, the more teaching opportunities you may have and the more years the earnings may have to compound. Here are some other advantages of these accounts:

• No contribution limits. Unlike 529 plans or Coverdell ESAs, custodial accounts have no annual or lifetime contribution caps, giving you the flexibility to save as much as you want for your child.
• No income restrictions. Anyone can open and contribute to a custodial account regardless of income level, unlike Coverdell ESAs, which phase out at certain income thresholds.
• Simpler than trusts. Trusts are suitable in many circumstances, but they're more complicated and costly to establish and manage. It can be more challenging to teach a child financial responsibility through a trust than through a custodial account. That said, you can have both.
• Full investment flexibility. Custodial accounts can hold cash, stocks, bonds, mutual funds, certificates of deposit (CDs) and other securities, and UTMA accounts may even include real estate or collectibles for broader wealth transfer options. 
• Potential tax advantages. When assets within a custodial account generate earnings, the first $2,700 (as of 2026) may be taxed at favorable rates, which may offer your family tax savings compared to holding the assets in an adult's name.
• Use for any purpose. Unlike 529 plans or Coverdell ESAs that restrict funds to education expenses, custodial account funds can be used for any purpose that benefits the child, such as college, a car, starting a business or other goals.
• Easy for gift-giving. Custodial accounts tend to be designed, in part, so that almost anyone can contribute. It's a way for anyone who cares about your child to give them a financial boost for their future. Plus, depending on the account you set up, you and your child can either use those funds for a specific purpose, such as education expenses, or allow your child to use them for anything once they're a legal adult.

Custodial accounts aren't the right choice for every situation. As a parent considering a custodial account for your child, understand their limitations before placing assets in them.

• Significant financial aid impact. Because a custodial account belongs to the child, college financial aid formulasexpect a significant percentage of the account to go toward higher education expenses. If you want your money to go further to help a child pay for college, you may be better off contributing to a 529 savings plan instead of (or in addition to) a custodial account.
• Irrevocable and cannot change the beneficiary. You can't transfer a custodial account to another child, nor can donors take back their contributions. Once money goes into the account, it permanently belongs to the named child.
• No control over how money is used. You can't withdraw the funds to use for a purpose that doesn't benefit your child. If it becomes apparent that your child may not be able to manage the money wisely when they gain full control of the account, you may not have as many options as you'd like for protecting the funds.
• Child gains full control at young adulthood. When your child reaches the age of majority (typically 18 or 21), they gain complete control of the account and can use the money for any purpose—whether that's college, travel, a car or other expenses you may not have intended.
• Kiddie tax applies. Investment earnings above $2,700 are taxed at the parent's marginal tax rate rather than the child's lower rate, potentially reducing the tax benefits compared to what many families expect.
• Gift tax reporting required. As noted earlier, parents and other family members who want to contribute to a child's custodial account should be aware that gifts larger than the annual exclusion amount count against the donor's lifetime estate tax exclusion.

Choosing the right savings vehicle for your child depends on your family's goals, tax strategy, financial aid priorities and long-term wealth planning needs. There's no one-size-fits-all answer, and many families benefit from using multiple account types to meet different needs.

You want maximum flexibility in how funds can be used beyond just education, you're comfortable with your child gaining full control at the age of majority, or you want to teach investing with real money.

Maximizing financial aid eligibility is a priority, you want to maintain control over funds and the ability to change beneficiaries, or you're focused specifically on education expenses with tax advantages.

You have significant assets requiring more control over distribution timing and conditions, or your estate planning needs are complex enough to require the additional cost and structure.

You want to maximize both tax advantages and flexibility by using a 529 plan for education savings alongside a smaller custodial account for teaching investing skills.

With up to 21 years to manage a custodial account for your child, you could accumulate enough assets to help them flourish in any number of ways: attending their dream school, traveling abroad, starting a business and more. The accounts are a great way for extended family to offer their support, too.

While a custodial account places a great deal of financial responsibility on your child in the coming years, it also presents an opportunity to teach wise money management now. To discuss custodial accounts and other options for investing in your child's future, connect with a Thrivent financial advisor.