A UGMA account is a custodial investment account that a parent, grandparent, or other adult opens and manages for a child. You can put in cash, stocks, or bonds, and the money legally belongs to your child. You make the decisions until they reach adulthood, usually 18 or 21 depending on your state. Then the account becomes theirs.
If you’re the kind of parent who saves every receipt and never pays full price, here’s a way to put some of those savings toward your kids’ future!
Birthday money from Grandma, a little from each paycheck, the money you saved on a great deal. It can all go into one place where it has years to potentially grow.
How Does a UGMA Custodial Account Work?
UGMA stands for the Uniform Gifts to Minors Act. It lets adults give money and investments to a child without setting up a formal trust.
Here’s who does what:
- The custodian (usually a parent) opens the account, picks the investments, and manages it.
- The child is the legal owner of everything in the account.
- Family and friends can add money, too, which makes it easy for grandparents to chip in.
One important detail: anything you put in is a gift to your child. You can’t take it back for yourself later.
There’s no annual contribution cap, though very large gifts may come with gift tax reporting rules.
What Can the Money Be Used For?
While your child is a minor, the custodian can use the money for things that directly benefit them. Think tutoring, summer camp, music lessons, sports gear, or school supplies.
Once your child reaches the age of majority, the account is theirs. They might use it for college, a first car, or a down payment on a home someday.
That flexibility is the biggest perk, and also the biggest thing to plan for. After the handoff, the decisions belong to your child. It’s one more great reason to start talking with your kids about money early!
How Are Custodial Accounts Taxed?
Earnings in the account, like dividends and investment gains, count as your child’s unearned income. They often get a tax break compared with a regular investment account in your name.
For 2026, it generally works like this:
- The first $1,350 of unearned income is tax-free.
- The next $1,350 is taxed at your child’s rate.
- Anything over $2,700 is taxed at your rate (this is the “kiddie tax”).
These amounts can change from year to year, so check the IRS’s rules on a child’s investment income or ask a tax pro about your family’s situation.
Is a UGMA or a 529 Better for Your Family?
A 529 plan is built for education. Earnings can grow tax-free when they’re used for qualified education costs, but other uses can come with taxes and penalties.
A custodial account is more flexible, since the money doesn’t have to go toward school. The tradeoff is that its earnings are taxable.
Financial aid is another thing to think about. Custodial accounts generally count as your child’s asset on financial aid forms, which can reduce aid eligibility more than a parent-owned 529 would.
Plenty of families use both: a 529 for college and a custodial account for everything else.
What Should You Know Before You Open One?
- It’s a permanent gift. The money belongs to your child, and you can’t move it back to yourself.
- Your child takes control at adulthood. The exact age depends on your state.
- Investing comes with risk. The account can go up or down in value, and no return is guaranteed.
- Fees add up. Look for clear, flat pricing and compare a few providers before you choose.
- Small, steady deposits count. Curious how regular contributions might add up over 10 or 18 years? Play with the numbers using this free compound interest calculator on Investor.gov, which is run by the U.S. Securities and Exchange Commission. Any rate you plug in is an estimate, not a promise.
How Do You Get Started?
Opening an account is much easier than it used to be. Many providers let you sign up online in a few minutes, right from your phone.
For example, a kids investment account from Fabric by Gerber Life can be opened with a $20 initial deposit. At the time of writing, it has a flat monthly fee of $3 for one child ($5 for multiple kids) and a 30-day free trial. Portfolios are professionally managed, and accounts are SIPC-protected up to $500,000. Keep in mind that SIPC protects against a brokerage firm failing, not against market losses. Check the current terms before you sign up.
Bargain-mom tip: When birthdays and holidays roll around, ask relatives if they’d like to add to the account instead of buying another toy. Kids get plenty of stuff, and a gift that could keep growing for years is a nice change!
You don’t need a lot of money to begin. Small deposits made regularly can give your child a head start, plus a hands-on way to learn how saving and investing work.
Do you already save for your kids? Share your favorite tips in the comments!
*This post is for general information only and isn’t tax, legal, or investment advice.
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