The younger you start investing, the longer your money has to grow - and the richer you’re likely to end up. If you want to give your child a start on growing wealth through investing, a custodial account can be the way to go.
A custodial account allows you to invest on behalf of your child until they reach the age of majority. Here are some of the best places to set up a custodial account for your child.
Best Custodial Accounts Overview
|TD Ameritrade||Saving for college||Includes a 529 option, and access to the powerful thinkorswim platform|
|Ally Bank||Bank accounts||Liquid, easy to start saving money|
|Trade||Established online trading||Access to research, market tools, and stock screeners|
|Charles Schwab||Full-service brokerage||Fractional shares, offers a 529 plan|
|Vanguard||Mutual funds||Access to a wide variety of low-cost index mutual funds and ETFs|
|Fidelity||Starting a retirement account||Extensive research and education, ability to open a Roth IRA for your child|
Best Custodial Accounts
If you’re hoping to save for your child’s college, TD Ameritrade offers a number of choices, from a taxable investment account to a tax-advantaged 529, to a Coverdell Savings account. As a result, you can decide what makes the most sense for helping your child save for college.
TD Ameritrade offers a number of helpful tools and screeners and is known for its thinkorswim trading platform. TD Ameritrade was recently acquired by Charles Schwab but so far remains separate for investing purposes.
If you’re looking for a custodial account for savings, not necessarily investing, Ally Bank can help. On top of that, if your state allows it, you might be able to open a joint account with your child. In any case, Ally Bank offers liquidity and a way to teach your child about saving. You can also get access to a custodial investing account through Ally Invest.
Ally Bank is considered one of the original online bank accounts and frequently gets high marks because of its lack of fees and easy access to money.
One of the oldest online discount brokerages, E*TRADE is considered one of the game-changers in online investment platforms. E*TRADE offers custodial accounts for children, making it easy for you to create a portfolio designed to grow over time.
On top of that, E*TRADE offers other features with the investing account including a debit card, checking, and bill pay. These tools can be used for you to help your child learn about different aspects of money management and how investing is part of a well-rounded financial portfolio.
Even though Charles Schwab acquired TD Ameritrade recently, the brokerage still operates separately. Charles Schwab is a full-service brokerage, so that makes it possible for you to get access to guidance as well as other tools and research as you’re building a portfolio on behalf of your child.
In addition to offering custodial accounts aimed at taxable investing, it’s also possible to save for college by opening a tax-advantaged 529 account. Charles Schwab also offers trust accounts for children, which can be more flexible and provide a way for you to transfer wealth to your child.
For those who want access to low-cost index mutual funds and ETFs, Vanguard can be a good choice for a custodial account. Rather than focusing on individual stocks, a Vanguard account allows you to take advantage of broad market performance over time, which can make it simpler to help build a portfolio for your child.
In general, Vanguard has higher account minimums than other brokers, but there are some exceptions, like custodial retirement accounts or 529 plans. Vanguard offers a variety of choices for investing on behalf of your child.
Fidelity is a full-service broker that offers access to a wide range of investments, including funds as well as individual stocks and bonds. You can use Fidelity to open a variety of accounts on behalf of your child as well. Plus, Fidelity is practically unmatched when it comes to its investment education library.
One of the selling points of Fidelity, however, is the fact that you can open a Roth IRA for your child and get them a head start in saving for retirement. Because your child is unlikely to make enough money to be required to pay federal income tax, you can start growing a retirement account with increased tax efficiency.
What Are Custodial Accounts?
Custodial accounts are financial accounts that you open on behalf of a minor. Because minors aren’t allowed to have their own financial accounts, they cant manage their own money. A custodial account lets an adult manage an account on behalf of a child.
However, it’s important to note that custodial accounts do, in fact, belong to the child. When the child reaches the age of majority, they are entitled to full access to the account and they have complete control. Depending on the state of residence, the age of majority might be 18 or 21.
It’s important to understand, however, that a 529 account isn’t actually a custodial account, even though you set it up with the intention of helping a child pay for college. With a 529, you actually own the account, while the child is the beneficiary. Also, note that a custodial IRA requires that your child have some type of earned income. Contribution limits are based on IRA limits set by the IRS, as well as by the amount of income your child earns in a year.
Learn More: Best Investment Plan for a Child’s Future
Pros and Cons
No contribution limits to custodial accounts
No gift tax on contributions up to $15,000 ($30,000 for a married couple)
Up to $1,100 in earnings might be exempt from federal income tax
Up to $1,100 in earnings beyond the exemption might be eligible for the lower child tax rate
Withdrawals can be made at any time, for any reason, as long as it’s for the benefit of the minor
Once the child reaches the age of majority (usually 18 or 21) they are entitled to full control of the account
Custodial accounts can impact financial aid for college, while a 529 owned by the parents has less of an impact
Taxes on amounts above the exemptions could be due
Contributions to these accounts are irrevocable — they belong to the child
Most Important Features to Look for in a Custodial Account
When choosing a custodial account for your child, it’s important to consider a number of factors to ensure that you’re getting the best possible deal for your child’s money and future. Here are some of the items to take into account when considering custodial accounts:
- Fees: Look at the costs of the account. Many custodial accounts now don’t have minimums or fees, but there might still be some other costs. For example, if a custodial account doesn’t charge transaction fees, you still have to pay attention to expense ratios for mutual funds and ETFs.
- Ease of access: Find an account that’s easy to access and navigate. This makes it easy for you to contribute to the account, or even set up recurring transactions.
- Ability to teach your child: Consider whether the account makes it easy to teach your child about investing and money. An account that can help your child see the benefits of good money habits can set them up for years to come.
- Other integrations: Don’t forget to consider whether the custodial account has other integrations, such as access to checking or other financial tools. Additionally, you can check to see if there are other accounts available, such as a non-custodial 529 or a retirement account.
Which Custodial Account Is Right for You?
The right custodial account for you depends on your goals, situation, and what you want to accomplish on behalf of your child. If you’re looking for a tax-advantaged retirement account on behalf of your child, then look for a custodial account that offers this choice.
Best Custodial Account Summary
|Ally Bank||$0||No fees for banking products|
|Vanguard||$1,000 for many accounts, double-check for different minimums||access to a variety of fee-free funds, but you’re still responsible for expense ratios|
|ETrade||$0||$0 on stocks and ETFs, $1 bonds, expense ratios apply to ETFs|
|TD Ameritrade||$0||$0 commissions on stocks and ETFs, expense ratios apply to ETFs|
|Charles Schwab||$0||$0 commissions on stocks and ETFs, expense ratios apply to ETFs|
|Fidelity||$0||$0 commissions on stocks and ETFs, but there are still expense ratios|
Do custodial accounts affects financial aid?
Because financial aid takes into account the assets owned by the applicant, custodial accounts can impact the amount of financial aid someone receives. It’s important to consider this before opening a custodial account for your child. Note, however, that a 529 owned by parents has a smaller impact on financial aid than a custodial account.
Can a parent withdraw money from a custodial account?
While a parent can withdraw money from a custodial account, the funds should be used on behalf of the minor. Once money is put into a custodial account, it belongs to the child and should only be used for their benefit.
Are custodial accounts taxed at capital gains rates?
Yes, custodial accounts are taxed at capital gains rates. However, the first $1,100 of gains might be exempt from tax and the next $1,100 might be taxed at a lower kids’ rate. Check with a tax professional to make sure you’re reporting and paying taxes correctly.
How We Chose This List
We reviewed various institutions with custodial accounts and chose those that were reasonably accessible and had a variety of features in order to provide choices for different needs and situations. There’s a good chance that at least one of the custodial accounts on this list will meet your needs.
A custodial account can be a way to help your child learn how to invest and build wealth for the future. However, it’s important to carefully consider the implications of a custodial account and make sure you balance various aspects of taxes and financial aid before moving forward.