You want the best future for the children in your life. From the time they’re very young, you envision them reaching all of their biggest goals.
But goals cost money.
That leaves many families wondering what the best way is to ensure that the children they love grow up with healthy finances so that they can afford to chase their dreams.
When it comes to setting your child up for financial success in the future, a custodial brokerage account is one of the main options available to you.
We’ll walk you through everything you need to know about custodial brokerage accounts, including the different types, how to open one, and why it may be the best choice for investing in your loved one’s goals.
What is a Custodial Brokerage Account?
A custodial account is a type of savings or investment account that an adult can open on behalf of a child in their life. The adult — known as the custodian — makes all of the investment decisions, such as what types of stocks and bonds the money is invested in.
Custodial accounts can hold many different types of assets, including stocks, bonds, cash, and more. Over the years, those assets can grow in value and earn interest or dividends, helping the account to grow even more.
The funds within a custodial account are irrevocable. That means that once someone makes a contribution, they can’t take it back — the money officially belongs to the beneficiary (child).
Then, when the child turns either 18 or 21 (depending on the state), control of the account is transferred to them, and they can decide what to do with the money in the account.
Custodial accounts are a great way for families to invest in their children’s future. Minors can’t open brokerage accounts themselves, so these accounts allow loved ones to give financial gifts that can grow and compound throughout a young person’s life.
Types of Custodial Brokerage Accounts
When you decide to open a custodial account for the young person in your life, you’ll have a couple of options to choose from:
UGMA vs. UTMA account
The UGMA account is named after the law that created it — the Uniform Gifts in Minors Act (UGMA). Each state has adopted the Uniform Gifts in Minors Act, allowing families across the country to save and invest for their children.
The other type of custodial account is the UTMA custodial account, named after the Uniform Transfers to Minors Act. The UTMA account was created 30 years after the UGMA account and has been adopted in all but two states.
The main difference between the UGMA account and UTMA account comes down to what assets each can hold.
An UTMA account can hold nearly any type of asset. It can hold financial assets such as stocks, bonds, cash, mutual funds, insurance policies, annuities, and more. But it can also hold physical assets like real estate, valuable art, or intellectual property.
The UGMA account can hold all of the same financial assets as an UTMA account, but it can’t hold physical assets.
For families with significant physical assets they wish to pass onto their children, an UTMA might make more sense. But for most families, the UGMA will offer more than enough options.
EarlyBird offers simple yet innovative UGMA accounts where parents and other loved ones can save and invest in their children's futures.
When loved ones open an EarlyBird account, they’ll first have the option to choose between five different ETF portfolios where the investments will go. The portfolios range from conservative to aggressive, meaning every family will find one that fits their investing preferences.
Families can also choose to invest up to 5% of the portfolio into values-based funds, which invest in companies that support causes such as environmental protection and diversity. This feature provides a unique opportunity for families to invest in the causes near and dear to them.
Once the custodian has set up the account, they can invite other loved ones to join. Family and friends can contribute to a child’s account in just a few simple steps. With each contribution, loved ones can also include a short video message for the child.
When the child grows up, they’ll have a memories feed filled with videos from over the years, making the financial gifts that much more meaningful.
Why Open a Custodial Brokerage Account
Here are some of the key reasons for opening a custodial account:
Save for a child’s future
The children in your life will face many expenses as they come of age and start their adult lives. By opening a brokerage account on their behalf, you can start investing in the future and help make their goals more reachable.
A college education today can easily cost tens of thousands of dollars, and advanced degrees often cost hundreds of thousands of dollars.
Education expenses aren’t the only costs your child might face. Starting a business, traveling the world, and buying a home are all costly initiatives where money in the bank can open so many doors for their future.
And while you could easily start putting money into a traditional bank account for your child, a custodial brokerage account gives that money an opportunity to grow and compound.
Teach your child about money
Financial literacy is one of the greatest gifts you can give to your children. Data increasingly shows that financial literacy is going down, and the numbers are even more grim for young Americans.
Children don’t often learn about finances in school, meaning it’s largely up to parents and loved ones to pass this knowledge onto their kids. Opening a custodial brokerage account is a great way to do that.
When you open a custodial brokerage account for a child, you can talk to them about investments and invite them to join in choosing assets within the account. They’ll start adulthood far more financially literate than most of their peers.
Create a sense of ownership over the funds for your child
In addition to teaching your child about money, opening a custodial brokerage account and talking to your child about it can create a sense of ownership over the funds.
Once the money is in the account, it’s theirs. No one can take it back out or reassign it to another person without their consent. (In some cases, the custodian can withdraw money for expenses that will benefit the child.)
Picture this: Throughout your child’s life, you talk to them about their custodial account. As the money grows, you encourage them to dream big about their future and what they could accomplish with their money.
Not only will that money be a useful tool for the child in the future, but it will carry a much deeper meaning.
Why custodial brokerage accounts are better than alternatives
Custodial brokerage accounts aren’t the only option to help you save and invest for your child’s future. But for many families, they’re likely the best choice.
The most important benefit of custodial accounts is their flexibility.
Other investment accounts, such as a 529 college savings plan or a custodial IRA, are meant for one specific purpose. While they might help your child in the future, they won’t give them the flexibility needed to reach any goal.
Custodial brokerage accounts also come with more flexibility in the asset classes you can invest in. 529 plans usually have far more investment limitations. A custodial brokerage account gives the custodian full control.
How to Open a Custodial Brokerage Account
Follow these five steps to open a custodial account for a child you love:
1. Choose the right broker
There are many brokers to choose from when you’re opening a custodial account. In fact, the variety of options can be overwhelming.
EarlyBird is specifically designed as an UGMA account and makes it simple for both parents and other loved ones to contribute.
You’d be hard-pressed to find another brokerage that makes it as simple and straightforward, meaning all of your attention can go to helping your child plan their future.
2. Open the account
Once you’ve chosen the right broker, it’s time to open your account.
With EarlyBird, it truly couldn’t be easier. In just a few minutes, a parent, grandparent, or another loved one can have the account opened and ready to invest in. Start by downloading the app and filling out some basic information.
3. Make your first contribution
Once you’ve set up the child’s custodial brokerage account, it’s time to start contributing.
It’s about so much more than that first contribution, though. A great way to set your child up for financial success in the future is to set up a recurring contribution to your child’s account.
4. Choose your asset allocation
It’s important to consider how you’ll invest the money within a custodial brokerage account. After all, if you contribute money but don’t invest it, it won’t have the opportunity to grow and compound.
EarlyBird makes it easy for parents and loved ones to invest the money in their child’s account. With five portfolios ranging from conservative to aggressive, each family will find a portfolio they feel comfortable with.
5. Invite friends and family to contribute
Other loved ones in your child’s life will also want to contribute to and invest in their future.
Once you open the custodial account, you can talk to friends and family about it and invite them to contribute. With more people contributing, the funds will grow even more quickly, helping secure your child’s future.
Not only will the extra funds make a world of difference, but they’ll also be a meaningful gift to the child. EarlyBird’s video message feature even allows contributors to leave a short message for the child. These videos will make a meaningful keepsake for your child in the future.
3 Things to Know About Custodial Brokerage Accounts
Custodial brokerage accounts are an incredible way to invest in a child’s future and help them reach any goal they might have. But before you open this type of account, there are a few things you should know.
When you invest in a brokerage account and earn money, you can usually expect to have tax implications. Custodial brokerage accounts are no different.
Luckily, because the money in a custodial account technically belongs to the child, returns are taxed as the child’s income.
The first $1,100 of earnings are tax-free. The next $1,100 is taxed at the child’s unearned income tax rate, which is usually lower than the parent’s tax rate. It’s not until earnings exceed $2,200 that they’re taxed at a higher rate.
The other potential tax implication to know about is the gift tax. It’s unlikely you’ll have to pay a gift tax, but it’s good to have it on your radar.
Anytime someone gifts another person $15,000 or more in a single year, they must file a gift tax return. The amount above $15,000 will subtract from the person’s lifetime exclusion, which is $11.7M.
In other words, you won’t pay a gift tax for contributing to a child’s custodial brokerage account until you’ve gifted millions of dollars.
The custodian of the brokerage account has full control of it as long as the child is a minor. During this time, they make all the investment decisions.
But everything in the account legally belongs to the child. When you contribute to a child’s custodial account, you can rest assured it’ll be waiting for them in the future.
Then, when the child reaches adulthood, they take full control of the account. They can leave the money invested and allow it to grow, or they can withdraw the funds to help pay for a particular goal.
In many ways, it’s a great thing that the child always maintains ownership of the money they’ve been given.
But some parents may have concerns about their children taking control of such a large sum of money at 18 years old.
It’s something to consider when you open this type of account, and a key reason why teaching a child financial literacy is so important.
3. Financial aid
It’s important to know that because the money within a custodial brokerage account legally belongs to the child, there are some financial aid implications.
When financial aid offices consider whether someone is eligible for financial aid, they consider both the parents’ and the child’s assets. They don’t expect parents to spend all of their money on a child’s college education, so they don’t weigh their assets as heavily.
But since a custodial account belongs to the child, financial aid offices may expect the child to use that money for college, which could make them ineligible for financial aid.
Custodial brokerage accounts are perhaps the best way to start saving for your child’s future at a young age.
You can set aside money throughout their childhood, helping contribute to their biggest goals. And because EarlyBird allows friends and family to contribute as well, the investment will mean that much more to your children.
EarlyBird offers a simple and meaningful way for families to invest in a child’s future. Not only will your financial gift help them as a young adult, but your video messages will provide the perfect keepsake.
Download EarlyBird on the app store today to start investing in the kids you love.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.