What is a custodial account?
A custodial account is an investment account an adult opens and manages on behalf of a minor. The adult (the custodian) controls the account until the child reaches the transfer age set by their state (usually 18 to 25), at which point the assets become the child’s to keep. Most custodial accounts today are UGMA or UTMA accounts.
Parents, grandparents, and other adults often use a custodial account to invest for a child’s future — a first car, a home down payment, college, or simply a head start on building wealth. Because the child can’t touch the money until adulthood, those investments can have years, even decades, to grow.
Here’s how custodial accounts work, how UGMA and UTMA accounts differ, how they’re taxed, and how to open one.
UGMA vs. UTMA: what’s the difference?
A UGMA account can hold financial assets — cash, stocks, bonds, mutual funds, and ETFs. A UTMA account can hold all of those plus other property, such as real estate, fine art, or intellectual property.
UTMA is typically the more flexible version, and it is now the universal one: every U.S. state has adopted it, South Carolina last, in 2022. UGMA custodianships opened before a state made the switch generally remain valid, so an older account may still be a UGMA.
Both are named after the laws that created them: the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). For most families investing in stocks and funds for a child, the practical difference comes down to what the account can hold and when control transfers to the child.
| UGMA | UTMA | |
| What it can hold | Financial assets — cash, stocks, bonds, mutual funds, ETFs | Financial assets plus physical/real property (real estate, art, etc.) |
| When the child takes control | Typically 18–21, depending on the state | Often later — up to 21 or 25, depending on the state |
| Where it’s available | Superseded by UTMA in every state; existing UGMA accounts remain valid | All 50 states |
| Common use | Gifting securities to a minor | Broader range of assets; the more common option today |
For a custodial brokerage account — one holding stocks, ETFs, and funds — you’ll be opening a UTMA. The label reflects your state’s law; the investing experience is the same.
Put your retirement investing on auto-pilot. You can open Traditional, Roth, and SEP IRAs on M1. Choose the one that fits your strategy.
How does a custodial account work?
The adult who opens and manages the account is called the custodian. The minor who will eventually receive the assets is the beneficiary. The custodian makes the investment decisions — choosing what to buy, contributing funds, and managing the holdings — but legally, the money belongs to the child from the moment it’s contributed.
Control transfers when the beneficiary reaches the account’s transfer age under their state’s law — sometimes called the age of termination. It is generally between 18 and 25, and it can be later than the state’s age of majority. In many states the adult opening the account can choose a later transfer age, often 21 or 25, so it is worth checking your state’s options before you open the account. Once control transfers, the child can use the assets for any purpose — the funds are no longer restricted to anything the custodian intended.
That irrevocability is a defining feature: contributions to a custodial account are considered a gift to the child and generally can’t be taken back.
Custodial account benefits and drawbacks
A custodial account can be a straightforward way to invest for a minor, but it isn’t the right fit for every goal. Weigh the tradeoffs before you open one.
Potential benefits:
- A long time horizon. Because a minor can’t legally invest on their own, a custodial account lets an adult invest on their behalf — and those contributions may have many years to potentially compound before the child reaches adulthood. It can also be a hands-on way to teach a child about long-term investing.
- No contribution limits. Unlike an IRA or 401(k), custodial accounts have no annual contribution cap. (Contributions may still have gift-tax implications — see below.)
- Flexibility of use. Once the child takes control, they can use the funds for any purpose. That’s different from education-specific accounts like 529 plans or Coverdell ESAs, whose tax advantages are tied to qualified education expenses.
Potential drawbacks:
- It’s irrevocable and the child gains full control. Once contributed, the money is the child’s. When they reach the account’s transfer age, they decide how to use it — even if that differs from what you had in mind.
- It may affect financial aid. Because the account legally belongs to the child, it’s generally treated as the student’s asset for financial aid purposes, which can weigh more heavily on aid calculations than a comparable parent-owned account.
- Earnings may be taxable. A custodial account is a taxable account with no special tax shelter, so investment earnings can create a tax bill (see the next section).
Custodial account vs. 529 plan: which one fits your goal?
The short answer: a custodial account is the more flexible option, and a 529 plan is the more tax-efficient one when the money is definitely for education. A custodial account’s assets can be used for any purpose once the child takes control; a 529’s tax advantages apply only to qualified education expenses.
| Custodial account (UGMA/UTMA) | 529 plan | |
| What the money can be used for | Any purpose, once the child takes control | Qualified education expenses, for the tax advantages to apply |
| Tax treatment | Taxable account; earnings may be subject to the kiddie tax | Earnings grow tax-deferred; qualified withdrawals are federally tax-free |
| Who keeps control | Transfers to the child at the state’s transfer age | The account owner, often the parent, keeps control |
| Financial aid treatment | Generally counted as the student’s asset | Generally counted as the parent’s asset |
Families whose only goal is college costs often favor a 529. Families who want the child to end up with general-purpose assets, or who want to invest directly in individual stocks and ETFs, often favor a custodial account. M1 offers UGMA/UTMA custodial accounts and does not offer 529 plans. Neither account is the right answer for everyone; the choice depends on your goal, your time horizon, and your tax situation.
How are custodial accounts taxed?
Custodial accounts don’t offer the tax advantages of retirement or education accounts. Investment earnings — interest, dividends, and capital gains — belong to the child and may be subject to what’s informally called the “kiddie tax.”
For the 2026 tax year, a child’s unearned income is generally taxed in three tiers: roughly the first $1,350 is offset by the dependent’s standard deduction and isn’t taxed, the next $1,350 is taxed at the child’s own (often lower) rate, and unearned income above $2,700 may be taxed at the parent’s marginal rate.
The exact treatment is calculated on IRS Form 8615. See IRS Topic No. 553 for current details.
Contributions can also carry gift-tax considerations. For 2026, gifts of up to $19,000 per recipient ($38,000 for married couples who split gifts) fall under the IRS annual gift-tax exclusion and generally don’t trigger gift tax or reduce your lifetime exemption. See the IRS gift-tax FAQ for the current rules.
Tax situations vary, and these rules change over time. Consider talking with a licensed tax professional to build a plan that fits your family.
How to open a custodial account
Opening a custodial account is usually quick. At M1, any client can open a custodial account in the app in a few minutes. To open one, you generally need:
- The child’s basic information, including their contact details and Social Security number
- Your own identifying information as the custodian
- An initial deposit or a linked funding source
From there, you (the custodian) manage the investments until the child reaches the age at which control transfers to them. Once they take ownership, the assets are theirs to use.
Investing in a custodial account with M1
M1 offers UGMA/UTMA custodial accounts, so you can invest for a child the same way you’d manage your own long-term portfolio. A few features can make custodial investing more approachable:
- Fractional shares let you put every dollar to work, so even a small, regular contribution can buy into a diversified set of stocks and ETFs rather than sitting as idle cash.
- Custom target allocations let you set the portfolio’s mix, and automatic rebalancing helps keep it aligned to that target as you add money over time — without requiring constant oversight.
- M1 charges no management fee on its investment accounts. M1 is not free, though — other fees may apply, so review the M1 Fee Schedule before you decide.
As with any investment account, the value of a custodial account can rise or fall, and all investing involves risk, including the possible loss of principal. A custodial account is one option among several for investing on behalf of a minor; the right choice depends on your goals, your time horizon, and your tax situation. You can explore M1 Invest to see how it works, and compare account types in the guides to brokerage accounts vs. IRAs and trust funds.
Why invest for a child early?
For a minor, time can be a significant investing advantage. Contributing consistently over a long horizon gives investments more opportunity to potentially compound before the child reaches adulthood.
Consider a simple hypothetical. Suppose a family sets aside $3,000 each year on a child’s birthday from birth until age 18 — $54,000 in total contributions. Where that money sits could lead to very different outcomes:
- Held as cash: about $54,000 — the contributions, with no growth.
- Invested in a diversified portfolio earning a hypothetical 7% average annual return: roughly $109,000.
This is a hypothetical illustration, not a projection of any specific investment. It assumes a constant annual return, which real markets don’t provide — returns vary year to year and can be negative — and it does not account for taxes or fees. Past performance does not guarantee future results, and investing involves the risk of losing money.
The M1 bottom line
Investing over time is a common approach to building wealth, though all investing carries risk — and minors can’t legally invest on their own. A custodial account is one way for an adult to start building wealth for a child until they come of age, with the child’s greatest asset working in their favor: time.
If a custodial account fits your goals, understanding whether you’re opening a UGMA or UTMA, how the earnings are taxed, and how control eventually transfers to the child will help you use it well.
Frequently asked questions about custodial accounts
A UGMA account can hold financial assets like cash, stocks, bonds, and funds; a UTMA account can hold those plus other property, such as real estate. Every U.S. state has now adopted UTMA — South Carolina was the last, in 2022 — and UTMA generally allows control to transfer to the child at a later age. Existing UGMA custodianships remain valid.
The earnings belong to the child, so the child is generally the taxpayer. For 2026, a child’s unearned income above $2,700 may be taxed at the parent’s marginal rate, per IRS Topic No. 553; below that, part is typically offset by the standard deduction and part is taxed at the child’s rate. Tax rules change and situations differ — consider consulting a licensed tax professional.
It depends on your state and the account type, but generally between 18 and 25 (the “age of termination,” which can be later than the state’s age of majority). UTMA accounts often allow a later transfer age than UGMA accounts. Once the beneficiary reaches that age, control of the assets transfers to them and they can use the funds for any purpose.
The custodian can generally make withdrawals before the child comes of age only if the funds are used for the benefit of the child. Contributions are irrevocable — they legally belong to the child and can’t be returned to the custodian. Rules can vary by state, so review your account’s terms.
It can. Because the account legally belongs to the child, it’s generally treated as the student’s asset in aid calculations, which can weigh more heavily than a parent-owned account such as a 529 plan. If college costs are your only goal, that difference is worth weighing; if you want the child to have general-purpose assets, a custodial account’s flexibility may matter more.
A custodial account (UGMA/UTMA) is a taxable investment account whose assets can be used for any purpose once the child reaches the state’s transfer age. A 529 plan is an education savings account whose earnings grow tax-deferred and can be withdrawn federally tax-free for qualified education expenses. A custodial account is generally counted as the student’s asset for financial aid and a 529 as the parent’s. M1 offers UGMA/UTMA custodial accounts and does not offer 529 plans. This is educational information, not investment or tax advice.
Yes. M1 offers UGMA/UTMA custodial accounts that support fractional shares, so contributions of any size can be invested across a diversified set of stocks and ETFs rather than left as idle cash. M1 charges no management fee, though other fees may apply — see the M1 Fee Schedule.
Updated July 28, 2026
Investing involves risk, including the possible loss of principal. This content is educational and is not personalized investment, tax, or legal advice. M1 does not provide tax advice; consult a qualified professional about your situation. Tax figures and rules referenced are set by the IRS and change periodically — verify current figures at IRS.gov. Brokerage products and IRAs are offered by M1 Finance LLC, member FINRA/SIPC.
M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. Past performance does not guarantee future performance.
All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. M1 does not provide any financial advice.
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