Investing as a Teen: What Custodial Accounts Are

A custodial account is just a brokerage or savings account that an adult opens for a minor. The kid technically owns the money, but the adult manages it until the kid hits a certain age. They're a real and useful tool — but there are a few things teens (and parents) should know before opening one. This is a good one to read with a parent.

Two main flavors: UTMA and UGMA

The two big custodial account types are:

• UGMA (Uniform Gifts to Minors Act) — older, can hold cash, stocks, bonds, mutual funds.
• UTMA (Uniform Transfers to Minors Act) — newer, can hold all of the above plus real estate, cars, and other assets.

Most modern brokerage accounts you'll see are UTMA. The differences mostly matter to lawyers. For everyday investing, they work the same way.

The SEC's Investor.gov has a glossary entry on custodial accounts.

How they actually work

The basics:

1. A parent (or legal guardian) opens the account at a brokerage like Fidelity, Schwab, or Vanguard.
2. The parent (or anyone) puts money in. The money legally belongs to the kid.
3. The parent invests it on the kid's behalf — usually in low-cost index funds or similar.
4. When the kid reaches the age of majority (usually 18 or 21, depending on the state), the account becomes fully theirs.

After that handoff, the kid can do whatever they want with the money. That's a big deal. We'll come back to it.

Why parents like them

A few reasons:

• The kid's money compounds for years. A $2,000 deposit at age 8, growing at 7%, is over $7,800 by age 28. See our investing basics page or compound interest for why.
• No income limit on contributions (unlike a Roth IRA, which requires earned income).
• It teaches investing concepts early when read together.
• Money can be used for anything — not just college, like a 529.

Why some parents don't use them

This is the honest stuff. Custodial accounts aren't for every family because:

• The money becomes legally yours at the age of majority. Your parents lose control. If a parent is worried about a teen blowing through it on a car or trip, that's a real concern.
• It can hurt financial aid. Money in the kid's name counts heavier on the FAFSA than money in the parent's name. The Federal Student Aid site explains this.
• It can't be moved to a different kid. Once it's in the account, it's that kid's money. You can't redirect it to a sibling.
• There can be tax surprises ("kiddie tax" rules apply to investment income above a small threshold).

What teens should know

Three honest things:

1. The money is yours, not just the account. When you reach the age of majority, your parent has to hand it over by law. That's powerful.
2. It comes with responsibility. A lot of teens get full control of a few thousand dollars at 18 with no plan. Most blow through it. The smart move is to learn investing now so you don't.
3. Talk with your parent before opening one. The conversation is more important than the account. Make sure you both agree on what the money is for.

What goes inside a custodial account

The most boring answer is also the right one: low-cost diversified index funds. Examples (not investment advice — just common picks):

• A total stock market index fund
• A target-date fund (a "set it and forget it" mix)
• A simple S&P 500 index fund

The SEC explains index funds here.

What not to load up on:

• Single stocks of the latest hyped company
• Crypto
• "Hot tip" investments from social media

For more on the why, see our investing basics page.

Roth IRA: a related option for teens with jobs

If you have earned income (a real W-2 or self-employment income), you may be able to open a custodial Roth IRA. The contributions can never exceed your earnings for the year. The money grows tax-free, and you can pull contributions out without penalty later.

The IRS Roth IRA page covers the limits. For most teens with a part-time job, this is a quietly amazing option.

When you turn 18 (or 21 — check your state)

The handoff is automatic. The brokerage will likely send paperwork. You'll be asked to set up your own login and possibly transfer the assets to a regular brokerage account in your name.

A practical wish list for what to do before that day:

• Read about index funds and basic investing.
• Talk with your parent about what they were investing in and why.
• Decide if you want to keep investing the same way or change.
• Don't withdraw it all to spend. Future-you will thank you.

Words to know

• Custodian — the adult managing the account
• Beneficiary — the kid who owns the money
• Age of majority — when control transfers (usually 18 or 21)
• Kiddie tax — special tax rules on investment income for minors
• UGMA / UTMA — the two account types

For more, see investing basics, Learn hub, or the glossary.

If you're not sure about anything in this article, ask a trusted adult — that's what they're there for.