Custodial Accounts for Kids: Teaching Tool with Trade-Offs

Many parents are turning to custodial accounts to help kids learn about saving and investing. These accounts, managed by an adult until the child turns 18 or 21 (depending on the state), come in two forms:

• UGMA (Uniform Gifts to Minors Act): Allows basic assets like cash, stocks, and mutual funds.
• UTMA (Uniform Transfers to Minors Act): Includes additional assets like real estate and intellectual property.

Why parents like them:

• Easy to set up at most banks and brokerages.
• Potential tax benefits: unearned income is taxed at the child’s lower rate, up to a point.
• No contribution limits and funds can be used for anything that benefits the child.

But there are trade-offs:

The Kiddie Tax: In 2025, unearned income over $2,700 is taxed at the parent’s rate—up to 37%.

Impact on financial aid: Custodial accounts count as student assets on FAFSA and can reduce aid eligibility. A 529 plan may be a better option for college savings.

Loss of control: When the child comes of age, they can spend the money however they choose.

Bottom line:

Custodial accounts are a great teaching tool but understand the trade-offs before you commit