Custodial accounts

A custodial account is a great way to save and invest for a child’s future! You can open a Wealthfront taxable Automated Investing Account for a minor. 

These accounts are established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), depending on your state/territory. They allow you, as custodian, to manage assets on behalf of a minor until they reach the age of termination.

How it works

Custodial accounts are owned by the minor, but managed by the custodian. Any contributions made to the account are considered irrevocable gifts to the minor. Once deposited, these funds can be used only for the minor’s benefit.

When the minor reaches the age of termination (typically 18 or 21, but this can vary depending on state law), the custodian is required to transfer the assets to the beneficiary, who then gains full control of the funds.

Key features of UGMA/UTMA Custodial Accounts

• No contribution limits: Unlike 529 plans, IRAs, and Trump Accounts, there are no annual limits on how much you can contribute to a custodial account. However, like other gifts, contributions may be subject to federal gift tax rules.
• Flexibility: Unlike 529 plans, which require that withdrawals be used for qualified education expenses to remain tax-free, custodial accounts allow funds to be used for any expense that benefits the minor: e.g., a first car, summer camp, tuition, or a housing down payment (there are some restrictions; more on this below).
• Tax considerations: A portion of the account’s earnings may be tax-exempt, and a portion may be taxed at the child’s tax rate rather than the parents’. We recommend consulting a tax professional to understand how the "Kiddie Tax" might apply to your situation.

Who is eligible

You can create a Wealthfront custodial account for a minor who is:

• Under 18 years of age
• A US citizen or Resident Alien with a social security number

The beneficiary does not have to be your child. They could be a grandchild, a niece or nephew, or even a family friend. That said, custodial accounts can have financial impacts on the minor and their parents that you should be aware of (more on this below).

How to open a custodial account

1. Start a new application: On your dashboard, select Open a new account > Automated Investing Account. On the ownership selection screen, choose "A minor with me as the custodian."
2. Provide beneficiary details: You will need details like the minor’s full legal name, date of birth, and Social Security number. You’ll also choose a transfer age if your state allows you to.
3. Complete the risk questionnaire: As the custodian, you will set the investment strategy based on your intended goals for the funds.
4. Fund the account: You can link a bank account for one-time or recurring transfers, or initiate an account transfer (ACATS) from a custodial account the minor owns at an external brokerage.

What happens when the minor reaches the age of majority?

Once the beneficiary reaches the legal age of transfer in their state, the custodianship ends. At that time, we will reach out to both the custodian and the beneficiary with instructions to transition the assets into an individual account in the beneficiary's name.

Until this process is completed, the custodian’s access to the account will be restricted. This means the custodian will no longer be able to withdraw, deposit, edit the portfolio, or change most account settings. All trading in the account, including automated trades, will also stop until control has been transferred to the beneficiary.

What expenses are eligible?

Unlike 529 plans, which are restricted to education-related costs, funds in a UGMA/UTMA account can be used for any expenditure that is for the benefit of the minor. This provides significant flexibility for expenses that fall outside of traditional schooling.

Common examples of eligible expenses include:

• Extracurricular activities: Fees for summer camps, sports teams, music lessons, or club memberships.
• Technology and tools: Laptops, tablets, or software needed for personal or educational development.
• Transportation: A first vehicle, car insurance, or public transit passes.
• Housing and Lifestyle: A down payment on a first home, furniture for an apartment, or travel experiences.
• Education: Private school tuition, tutoring, or college expenses not covered by other savings.

While the "benefit of the minor" rule is broad, there are two primary legal restrictions:

1. Parental Obligations: The funds cannot be used for "standard parental obligations." This includes basic necessities that a parent is legally required to provide, such as basic food, clothing, and shelter.
2. Sole Benefit: The expenditure must be for the minor's benefit alone. You cannot use the funds to pay for expenses that primarily benefit the custodian or other family members (e.g., using the minor's funds to pay the family's mortgage).

It’s a good idea to keep detailed records on all withdrawals. If the minor or a tax authority ever questions the use of the funds, you will need to demonstrate that the withdrawals were made in the minor's best interest.

Can I withdraw money to pay for the minor's college? Yes. However, because custodial accounts are considered the legal property of the minor, they are weighted more heavily than parental assets on the FAFSA (Free Application for Federal Student Aid). This may reduce the amount of financial aid the student is eligible to receive compared to assets held in a 529 plan.

What tax considerations should I know about?

The IRS splits a child’s unearned income into three tiers (2026 amounts shown):

• The first $1,350 is tax-free as part of the child’s standard deduction.
• The next $1,350 is taxed at the child’s individual marginal tax rate, which is usually 10%.
• Any unearned income over $2,700 is taxed at the parents’ marginal tax rate.

Before opening a custodial account, make sure you understand how it will affect the child’s parents’ taxes. If you are not the parent, you are still responsible for providing the child’s parents with the account’s tax documents each year. Learn more here.

Wealthfront does not provide tax advice. We recommend consulting with a tax professional before opening a custodial account.