Custodial investment accounts, also known as UTMA or UGMA accounts, are financial accounts that are managed by an adult custodian on behalf of a minor. These accounts are typically opened by parents or grandparents with the purpose of saving money for the child’s future expenses such as college education or buying a car.
When the child reaches the age of majority, typically 18 or 21, the account will be transferred to the child’s ownership and they will have complete control over the funds and can use them as they see fit.
It is important to note that these accounts do not have the same tax and aid advantages as traditional educational savings accounts, but they offer more flexibility in terms of how the funds can be used, such as education or starting a business.
If you’re a parent or grandparent looking to transfer wealth to your child, a custodial investment account may be a good option to consider. This guide provides an overview of what to look for in a custodial investment account and highlights some of the best options available.
Know Before You Open A Custodial Investment Account
Once a UTMA account is set up, the gift is final and cannot be revoked. The account will be transferred to the account holder at the legal age of majority in your state, regardless of the child’s actions or spending habits. Additionally, if the contribution to the account exceeds $15,000 per year, it may be subject to gift taxes. It’s important to be aware of the gift tax rules and regulations. Furthermore, once the account is handed over to the child, they have the freedom to use the funds for whatever they desire, which may not align with the original intention of the account holder. Lastly, custodial accounts like UTMA can have an impact on the child’s eligibility for need-based college financial aid, it’s good to be aware of that when considering this type of account. considering alternate account options like educational savings accounts may be more appropriate in cases where educational savings is the main goal.
Opening a custodial investment account, such as a Uniform Transfer to Minors Act (UTMA) account, can be a great way to save for a child’s future. However, before opening one, there are a few important things to consider:
- Irrevocable nature of the gift: Once you open a UTMA account, the gift is final and cannot be revoked. The account will be transferred to the account holder at the legal age of majority in your state, regardless of the child’s actions or spending habits.
- Gift Tax: If the contribution to the account exceeds $15,000 per year, it may be subject to gift taxes. It’s important to be aware of the gift tax rules and regulations and consult a tax advisor if needed.
- Spending discretion: Once the account is handed over to the child, they have the freedom to use the funds for whatever they desire, which may not align with the original intention of the account holder.
- Financial Aid Impact: Custodial accounts tend to have an outsized effect on a child’s ability to receive need-based college aid. If the goal is educational savings, other account options may be more appropriate.
- Investment risk: These types of accounts are typically invested in stock, bonds or mutual funds, which could be subject to market volatility. It’s important to consider the investment risk and take a well-informed decision about how and where to invest the funds.
- Asset protection: It’s important to consider how the assets in a custodial account may be protected from creditors, lawsuits and other legal issues.
- Proper documentation: Setting up a custodial account may require specific legal documentation, it’s important to have all the paperwork in order and ensure that the account is set up correctly.
- Proper account management: After the account is set up, it’s important to keep track of the account, monitor its performance and make sure the funds are invested appropriately.
In summary, opening a custodial investment account can be a great way to save for a child’s future, but it’s important to be aware of the terms and conditions, tax implications and investment risks, and ensure that the account is managed appropriately. Seek professional advice if needed.
Best Features of Custodial Accounts
Custodial accounts are financial accounts that are established and managed by an adult, called a custodian, on behalf of a minor. Some of the key features of custodial accounts include:
- Legal ownership: The minor is the legal owner of the assets in the account, but the custodian has control over them until the minor reaches the age of majority.
- Tax benefits: Custodial accounts may offer tax benefits, such as the ability to avoid gift taxes when contributing money to the account.
- Limited withdrawal rights: The custodian has the authority to withdraw money from the account for the benefit of the minor, but the funds in the account cannot be withdrawn for the custodian’s own benefit.
- Transferability: The custodian can transfer the custodianship of the account to another person, subject to certain conditions.
- Control over account: The custodian has the authority to manage and invest the funds in the account, make withdrawals for the minor’s benefit, and make account changes.
- Limited liability: The custodian is not personally liable for any losses or debts incurred through the account, and minor is protected by the law and age limit.
- Age limit: Most custodial accounts can be closed or transferred to the minor when they reach the age of majority (varies by jurisdiction, but usually around 18-21 years old).
- User-friendly – It’s crucial for custodial accounts to be easy to navigate. Regrettably, many brokerages make it challenging to access important information. The brokerages we recommend prioritize simplicity, making it easy to monitor performance, execute trades, and even set up automatic investing.
- Low cost – High fees for custodial accounts are unnecessary. Many options are available with no trade fees and low fund fees (such as mutual funds or ETFs).
- Simple compliance – Due to their ownership by minors, it’s important for custodial accounts to be in compliance with legal requirements. Our recommended brokerages make it easy for parents to file taxes accurately based on their child’s assets.
- Investment options – Some investors prefer diversified index funds while others prefer individual stocks or bonds. We did not review any accounts that hold “real assets” or alternatives (like mortgage notes or real estate). However, most of our recommendations provide a range of investment options.
Best Brokerages For Custodial Investment Accounts
M1 Finance:
M1 Finance is an online investment platform that provides investors with a variety of investment options, including stocks, bonds, and ETFs. Some of the key features of M1 Finance include:
- Automated Investing: M1 Finance uses a concept called “Pies” that allow investors to create a diversified portfolio based on their investment goals.
- Low Fees: M1 Finance charges no trading fees and no account minimums. The platform also offers fractional shares, which allows investors to invest in high-priced stocks with a small amount of money.
- Tax-Efficient: M1 Finance has a tax-efficient feature called “tax loss harvesting” that automatically sells securities that have lost value, allowing investors to offset capital gains in their portfolio.
- Recurring Investment: the platform offers the ability to set up recurring investments, that automatically invests in your pie on a schedule you choose.
- Wide range of Investment options: M1 Finance offers a wide variety of investment options, including stocks, bonds, and ETFs. Additionally, the platform offers more than 80 expert-created pies that are tailored to different investment goals and risk tolerance levels.
- Auto-Rebalancing: M1 Finance automatically rebalances portfolios when the allocation of assets deviates from the original allocation.
- Research & Learning: M1 Finance has a section dedicated to research and learning about investing that includes articles, videos, and educational resources.
It is worth noting, M1 Finance is not a custodial account, It does not provide the legal structure and extra protections that are specific to custodial accounts.
Charles Schwab:
Charles Schwab is a financial services company that provides a wide range of products and services to individual investors, including brokerage services, banking, and investment advice. Some of the key features of Charles Schwab include:
- Brokerage services: Charles Schwab provides brokerage services that allow investors to buy and sell stocks, bonds, mutual funds, ETFs, options, and other securities.
- Investment advice: Charles Schwab offers investment advice through its Schwab Intelligent Portfolios robo-advisory service.
- Custodial Accounts: Charles Schwab has options for custodial accounts, which are financial accounts that are established and managed by an adult on behalf of a minor. These accounts may include UTMA (Uniform Transfer to Minors Act) and UGMA (Uniform Gift to Minors Act) accounts.
- Cash management: Charles Schwab offers banking services, including checking and savings accounts, credit cards, and loans.
- Low fees: Charles Schwab offers commission-free trading for online U.S. exchange-listed stocks, ETFs, and options. It also has a program that reimburses other fees, such as those from other online brokerages.
- Research and tools: Charles Schwab offers research and tools to help investors make informed decisions, including market data, stock and fund screeners, and financial calculators.
- Retirement planning: Charles Schwab provides retirement planning and advice, including the option for self-directed individual retirement accounts (IRAs).
- Support: Charles Schwab offers a wide range of support options, including online chat, phone, and in-person meetings at one of its many branches.
E*TRADE:
ETRADE is an online brokerage firm that provides a wide range of investment products and services to individual investors. Some of the key features of ETRADE include:
- Brokerage services: E*TRADE offers a variety of brokerage services, including the ability to buy and sell stocks, options, mutual funds, ETFs, bonds, and other securities.
- Investment advice: ETRADE offers investment advice through its robo-advisory service, ETRADE Core Portfolios.
- Retirement planning: E*TRADE offers a variety of retirement planning tools and services, including self-directed individual retirement accounts (IRAs) and rollover IRAs.
- Research and tools: E*TRADE provides a wide range of research and tools to help investors make informed decisions, including market data, stock and fund screeners, and financial calculators.
- Low fees: E*TRADE offers competitive pricing for trades, no account minimum, no inactivity fee and have no volume tiered pricing.
- Advanced trading options: E*TRADE offers advanced trading options like options trading, futures trading and forex trading.
- Mobile trading: E*TRADE offers mobile trading apps for both iOS and Android devices that provide investors with the ability to trade and manage their accounts on the go.
- Support: E*TRADE offers a wide range of support options, including online chat, phone, email, and in-person meetings at one of its many branches.
- Custodial account: E*TRADE also offer custodial account options, which are financial accounts that are established and managed by an adult on behalf of a minor. These accounts can be set up as UTMA (Uniform Transfer to Minors Act) or UGMA (Uniform Gift to Minors Act)
It is worth noting that, as with any investment service, E*TRADE and its products have their own set of risks and you should always read the terms and conditions before making any investments or opening any accounts.
VANGUARD:
Vanguard is a large investment management company that offers a wide range of investment products and services to individual investors, including mutual funds, ETFs, and brokerage services. Some of the key features of Vanguard include:
- Low-cost funds: Vanguard is known for its low-cost mutual funds and ETFs, which charge some of the lowest expense ratios in the industry.
- Investment advice: Vanguard offers investment advice through its robo-advisory service, Vanguard Digital Advisor.
- Retirement planning: Vanguard offers a variety of retirement planning tools and services, including self-directed individual retirement accounts (IRAs) and 401(k) rollover options.
- Research and tools: Vanguard provides a wide range of research and tools to help investors make informed decisions, including market data, stock and fund screeners, and financial calculators.
- Brokerage services: Vanguard offers brokerage services, which include the ability to buy and sell stocks, options, mutual funds, ETFs, bonds, and other securities.
- Access to Vanguard funds: Vanguard’s own funds are only available to clients of the firm, but it offers more than 1,800 other funds from other providers.
- Mobile trading: Vanguard offers mobile trading apps for both iOS and Android devices that provide investors with the ability to trade and manage their accounts on the go.
- Support: Vanguard offers a wide range of support options, including online chat, phone, email and in-person meetings at one of its many branches.
- Custodial Accounts: Vanguard has options for custodial accounts, which are financial accounts that are established and managed by an adult on behalf of a minor. These accounts may include UTMA (Uniform Transfer to Minors Act) and UGMA (Uniform Gift to Minors Act) accounts.
It is worth noting that, as with any investment service, Vanguard and its products have their own set of risks and you should always read the terms and conditions before making any investments or opening any accounts.
Apps To Set Up Custodial Investment Accounts
UNEST:
UNest is a mobile application that offers a custodial account service for parents and families to save and invest for their children’s future expenses, like college or a down payment on a home.
Some of the key features of UNest app include:
- Custodial Accounts: UNest offers custodial accounts, which are financial accounts that are established and managed by an adult on behalf of a minor. These accounts may be set up as UTMA (Uniform Transfer to Minors Act) accounts.
- Low minimum investment: UNest app allows account holders to open an account with a low minimum investment amount, making it accessible to a wide range of parents and families.
- Investment options: UNest offers a variety of investment options, including stocks, bonds, and ETFs. Users can choose from a variety of pre-built portfolios, or create a custom portfolio according to their risk tolerance and investment goals.
- Automated Investing: UNest has a feature that allows for automated recurring investments and automatic portfolio rebalancing
- Tax-efficient features: UNest offers tax-efficient features like automatic tax-loss harvesting, which can help users minimize taxes on their investment gains.
- College savings plan: UNest’s account can be used for a variety of future expenses, but one of its key focuses is for a college savings plan.
- Mobile and easy to use: UNest is a mobile-first app that’s easy to navigate and manage.
- Support: UNest has a support team to help users with any questions or issues related to their accounts.
It is worth noting that, as with any investment service, UNest and its products have their own set of risks and you should always read the terms and conditions before making any investments or opening any accounts.
STOCKPILE:
Stockpile is a mobile application that allows users to buy, sell, and hold stocks, ETFs, and other securities using fractional shares. This means that users can invest in a stock or ETF with as little as $1, even if the stock’s price is much higher.
Some of the key features of Stockpile include:
- Fractional shares: Stockpile allows users to buy and sell fractional shares of stocks, ETFs, and other securities, making it possible to invest in expensive stocks and funds with a small amount of money.
- Stock gifting: Stockpile offers a feature that allows users to buy stock as a gift for friends and family.
- Low fees: Stockpile has low fees for trading, with $0.99 for fractional shares and $4.95 for whole shares.
- Mobile and easy to use: Stockpile has a mobile app that is easy to navigate and use.
- Investment options: Stockpile offers a variety of investment options, including stocks, ETFs, and funds from various companies.
- Education and research: Stockpile has an educational section on its website, with articles and tutorials to help users to better understand investing and the stock market.
- Support: Stockpile has a customer support team to help users with any questions or issues related to their accounts.
It is worth noting that, as with any investment service, Stockpile and its products have their own set of risks and you should always read the terms and conditions before making any investments or opening any accounts. Additionally, Stockpile is not a custodial account and do not offer the legal structure and extra protections that are specific to custodial accounts.
ACORNS EARLY:
Acorns Early is a mobile app that offers a custodial investment account for parents to save and invest for their child’s future expenses. The app automatically rounds up everyday transactions and invests the spare change in a diversified portfolio.
Some of the key features of Acorns Early include:
- Custodial Accounts: Acorns Early offers custodial accounts, which are financial accounts that are established and managed by an adult on behalf of a minor. These accounts may be set up as UTMA (Uniform Transfer to Minors Act) accounts.
- Automated savings: Acorns Early rounds up users’ everyday transactions and automatically invests the spare change in a diversified portfolio.
- Investment options: Acorns Early offers a variety of investment options, including stocks, bonds, and ETFs. Users can choose from a variety of pre-built portfolios, or create a custom portfolio according to their risk tolerance and investment goals.
- Low minimum investment: Acorns Early allows account holders to open an account with a low minimum investment amount, making it accessible to a wide range of parents and families.
- Tax-efficient features: Acorns Early offers tax-efficient features like automatic tax-loss harvesting, which can help users minimize taxes on their investment gains.
- College savings plan: Acorns Early’s account can be used for a variety of future expenses, but one of its key focus is for college savings plan.
- Mobile and easy to use: Acorns Early is a mobile-first app that’s easy to navigate and manage.
- Support: Acorns Early has a support team to help users with any questions or issues related to their account.
It is worth noting that, as with any investment service, Acorns Early and its products have their own set of risks and you should always read the terms and conditions before making any investments or opening any accounts.
