Custodial Brokerage Account Explained

Ready to turn your child into an investment tycoon? 👶

Imagine graduating from high school with an impressive investment portfolio that was started for you while you were still a toddler. 

Sound like a good idea? It is. ✅

Thanks to custodial brokerage accounts, this is something that is within the realm of possibility—well maybe not for you, but for your kids who are crawling around the floor as you read this article. Even if your kid is standing over your shoulder, pestering you to be allowed to play on their iPad, it is never too late to start investing for your children. 

Besides helping you save for your kids’ future, custodial brokerage accounts can help teach children all about investing, setting them up for financial success before they even reach the age of 18. Additionally, custodial brokerage accounts tend to have more favorable terms than other types of accounts available for minors, making them a good deal for your wallet as well as for your child’s wellbeing.  

Either way, it is never too early to start teaching your kids about stocks, as one South Korean pre-teen proved, when he made returns of over 43% from a custodial brokerage account that he pestered his mother to open for him. 

But even if you think your son or daughter might be the next Warren Buffet, there are still some risks to opening a custodial brokerage account, which is why you must do your best to learn all about them before you put your hard-earned money, and your child’s future, on the stock market. Read on to learn all about opening and investing in a custodial brokerage account as well as picking the perfect type of account to use to build your children’s future. 

What you’ll learn

• What's a Custodial Brokerage Account?
• How Does a CBA Work?
• UGMA and UTMA Accounts
• Why Use a Custodial Brokerage Account?
• Investing with a Custodial Brokerage Account
• Finding the Best Custodial Brokerage Account
• How to Open a Custodial Account
• Conclusion

What is a Custodial Brokerage Account, Exactly? 🔎

In basic terms, a custodial brokerage account is a savings or investment account opened on behalf of a minor child by the parent or other formal guardian. Beyond just setting up the account, the custodial adult will also maintain control of all the transactions within the account until the child reaches the legal age of majority, either 18 or 21 depending on the state. At that time the control of the account will be transferred to be solely under the control of the child.

The cool part about a custodial brokerage account is that they function just like almost any other savings or brokerage account you can think of, allowing the account holder to invest in a number of assets just as they would be able to with a regular account—under the watchful eye of the account custodian. 

The only thing you should note is that custodial brokerage accounts typically don’t allow children to invest in risky financial products like options and futures. But for a minor learning about the stock market and how it works, these are generally the furthest thing from their mind as they are going through school and thinking about college. 

The most recent survey taken, which was performed in 2013, found that over 17 million Americans have custodial brokerage accounts for a minor in their care. And the number is suspected to have grown over the years and be much higher now as many people believe that a custodial brokerage account is a good way to invest in their children’s future. 

How Does a Custodial Brokerage Account Work? 💭

Before you dive in and sign up for an account for your child, you are probably wondering a bit how these custodial brokerage accounts work. 

In most cases, a custodial brokerage account works like any other bank account. You will open the account, deposit money, then select investments on your child’s behalf. If your child is a little older, they may enjoy giving their input as you select assets to put their future money in. 

And just like any other brokerage account, if your child decides they would like to move their investments at a certain point, this is definitely possible, they will just need your approval to do so. Some banks allow children on custodial brokerage accounts to have their own login to their account, but on a restricted platform, that will request your approval before any money can be moved. 

When your child reaches the age of majority in your state, the custodian, by law, must turn the account over to their sole control. This is typically done with a simple online login process, or a phone call to the bank the account is set up at. This is very easy and within a few minutes your child, turned young adult, will have their very own brokerage account already earning them returns. 

UGMA and UTMA Accounts 👤

Now there are a couple of different types of custodial brokerage accounts to choose from. And honestly, when it comes to the two most popular types of custodial brokerage accounts, it is hard to go wrong with your selection. 

A UGMA account stands for Uniform Gift to Minors Act while UTMA stands for Uniform Transfer to Minors Act. Both accounts allow you to invest cash, stocks, bonds, mutual funds, and insurance policies on behalf of your child. 

The only difference is that the UGMA is more specific about the type of assets you can invest in for your child. The major asset that is excluded under UGMA but not in a UTMA account is the ability to pass on real estate investments to your child. Therefore if you wish to include real estate in your child’s portfolio, a UTMA account will be better. 

Unfortunately, the state you live in may only offer one of the above two accounts, meaning your decision might already be made for you. So don’t waste too much time fretting over choosing between a UGMA and a UTMA as either one is a great decision for your family. 

Why Use a Custodial Brokerage Account? 👨‍👩‍👧‍👧

At this point, you may be wondering just why you would want to open a custodial brokerage account for your child. After all, isn’t a plain old savings account good enough? And the truth is, there are many benefits you can reap from opening your child a custodial brokerage account that can’t be found in other account types. 

Pros of a Custodial Brokerage Account ✅

First and foremost, you are much more likely to gain larger returns from a custodial brokerage account than you would with a traditional savings account (the stock market average is about 10% per year). This means that your child’s money can grow as they do, rather than simply rising with inflation with the quarterly interest rates that are given to customers with a regular savings account. 

Additionally, opening a custodial brokerage account can help you out with your taxes. This is because investment income is taxed, and since funds in a custodial brokerage account technically belong to your child and not you, this means that they are taxed based on your child’s income, which is probably nothing. This way you won’t have to pay taxes on the investment returns as you would if you invested money for them through your own personal brokerage account. 

And the final reason that you should consider a custodial brokerage account rather than say, a 529 savings account, is because there is no limit to how the money in a custodial brokerage account can be spent. This is in stark contrast to the 529 savings account that has strict regulations and penalties if you spend the money on non-higher education (college) based items. 

Although you are probably opening a custodial brokerage account to save for your child’s education, it is always great to have this flexibility. This way if your child wants to use the money for something besides college—because maybe they’ve received a full-ride scholarship—they will have the flexibility to do so. 

Cons of a Custodial Brokerage Account ⚠️

Of course, a custodial brokerage account isn’t all sunshine and rainbows, however, and there are a few downsides you should know about before opening one for your child. 

The biggest downside is that when your child is officially given the account, usually on their 18th birthday, the assets are seen by law as belonging to a child. This means that if they would like to qualify for financial aid in college, they may find themselves unable to because of the large investment balance in their custodial brokerage account. So when you need your kid to qualify for financial aid, a typical 529 savings account may be better. 

Another downside that is worrisome for some people, but not for others, is the fact that you must turn over the account when the child reaches the age of majority. Therefore, whether you trust your child or not they will receive control of the account at this time. This worries many parents because they believe their child isn’t financially mature enough even though they are seen as an adult under the law in their state.

The Good and the Bad with Custodial Brokerage Accounts 📊

How to Invest in a Custodial Brokerage Account 📈

So you’ve opened a custodial brokerage account on behalf of your child and now you are wondering just how you should invest the money that is in the account. Generally, when it comes to investing money for your child, you will want to find assets that balance risk with reward that will generate returns long term. 

This means that you don’t have to be quite as cautious with your asset picks as you would for a retirement account. Feel free to create a mix of stocks and ETFs for your child. Don’t be afraid to go for stocks that are a little more risky than you normally would, because over the long term they may pay off. 

Of course, you’ll want to vet any asset that you plan to invest in just as if you were investing in it yourself (which you are!) and look for assets that you specifically believe have the potential to grow over the coming years. And if you think that a stock is too risky, even for a long-term investment on behalf of your child, then it probably is. 

This doesn’t mean you have to avoid investing in gold and bonds. Stable assets like these can be a great way to balance risk in your child’s portfolio, just don’t be afraid to venture out and explore other asset options on behalf of your child. 

How to Find the Best Custodial Brokerage Account 🧠

There are many choices when it comes to companies that offer custodial brokerage accounts. And just like anything else in life, you will want to shop around a little bit before you buy. 

When looking for a company to open a custodial brokerage account, you will want to look for a few specific attributes. You will obviously want to find a broker that is reliable, with easy access to customer service. This is important with a custodial brokerage account because you may have questions along the way. 

Besides just stellar customer support, you will additionally want to find a company that offers low fees. This is because fees can really eat into profits long term, and the last thing you want is for your child to graduate high school and be handed an account that they can’t pull money out of without paying hefty fees. 

Many financial institutions like Fidelity offer custodial brokerage accounts with little to no fees, it is best to select one of these. However, if you don’t want to micro-manage your kid’s account and want someone else to do it according to your goals, a robo-advisor like Acorns is a great choice.

And don’t forget to also look at the assets a brokerage firm offers for custodial accounts. As mentioned above, you will want to use a mix of assets to create your child’s portfolio and this will be tough to do without being able to purchase a variety of assets. If a custodial account seems too restrictive with the assets available for investment, it is probably better to look somewhere else. 

Before you panic and begin searching the web for the best custodial stockbroker, if you already have an account with a brokerage firm you love, it’s worth reaching out to them to see if they offer custodial brokerage accounts. This will make opening one through them easy since you will already be familiar with the company and how their accounts work. 

Fees

Commissions

$0

$3 or $5/month

Account minimum

$0

$5 required to start investing

Minimum initial deposit

$0

$0 to open account

General

Best for

Low commissions

People who struggle to save

Highlight

Large range of research providers

“Invest spare change” feature

Promotion

None

Rating

8.0/10 Visit Fidelity on Fidelity's website

7.0/10 Visit Acorns on Acorns' website

Fees

Commissions

$3 or $5/month

$0

Account minimum

$5 required to start investing

$0

Minimum initial deposit

$0 to open account

$0 to open an account, $100 to start investing

General

Best for

People who struggle to save

Socially responsible investing & low fees

Highlight

“Invest spare change” feature

No-cost automated investing

Promotion

None

Rating

7.0/10 Visit Acorns on Acorns' website

9.0/10 Visit M1 Finance on M1 Finance's website

Fees

Commissions

$0

$3 or $5/month

$0

Account minimum

$0

$5 required to start investing

$0

Minimum initial deposit

$0

$0 to open account

$0 to open an account, $100 to start investing

General

Best for

Low commissions

People who struggle to save

Socially responsible investing & low fees

Highlight

Large range of research providers

“Invest spare change” feature

No-cost automated investing

Promotion

None

None

Rating

8.0/10 Visit Fidelity on Fidelity's website

7.0/10 Visit Acorns on Acorns' website

9.0/10 Visit M1 Finance on M1 Finance's website

How to Open a Custodial Account 💡

Are you ready to take the plunge and open a custodial brokerage account for your child? Once you’ve found the company you want to open an account through, the good news is, the rest is smooth sailing from there! 

Most companies allow you to open a custodial account online, and the process typically takes right around 15 minutes. Before you begin the process, to keep it fast, you will want to have the following information with you and ready to go:

• ☑️ Your Child’s Name, Birthdate, and Social Security Number
• ☑️ Your Driver’s License Number
• ☑️ Your Social Security Number
• ☑️ Your Bank Information (The one you plan to use to fund the account)
• ☑️ Your Employer’s Name and Address

Now you may not need all this information depending on the brokerage firm you are opening the account with, but it is a good idea to have all this information on hand so there won’t be any delays in opening your custodial brokerage account! 

Conclusion 🏁

Whether or not you think your child might be a prodigy in internet investing it’s likely that a custodial brokerage account is the one for you. There is no other account that lets you jump-start your child in the investment world while simultaneously letting you still provide your stock expertise. 

Opening a custodial brokerage account is easy, and only takes a few minutes of your time. And there is nothing like helping your child learn about financial investing while they watch their own investment grow. So no matter which type of custodial brokerage account you decide to go with, there is no reason to delay and you should open one for your child today! 

About the author

Tim Fries

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Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.