Best Custodial Accounts of 2023

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With the rising student and housing debt and an overall lack of retirement savings, helping children get on the path to greater financial literacy and security is a priority for many people. Parents, relatives, and friends can help a child by contributing to their financial future with a custodial account. The Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) are the two main types of custodial accounts used to give financial gifts to minors. The benefactor manages the irrevocable gift until the minor becomes of age, from 18 to 25, depending on the state. The investments within the account are taxed at the minor’s rate and subject to the kiddie tax.

UGMA and UTMA aren’t the only options when choosing a child's financial account. Alternatives to custodial accounts include 529 college savings accounts, trusts, and Coverdell education savings accounts. Each of these account types have advantages and disadvantages. It’s important to understand how the funds within each account are taxed as well as how they may impact the child’s eligibility for higher education financial aid, if helping with higher education is the intention of the account.

Best Custodial Accounts of 2023

Best Overall: Charles Schwab
Best for College Savings: Vanguard
Best Robo-Advisor and Best for Research Resources: Merrill Edge
Best for Educational Content: Fidelity Investments

Best Overall : Charles Schwab

Fees: 0% ($0 Schwab Intelligent Portfolios; $30/month Schwab Intelligent Portfolios Premium)
Account Types: UGMA/UTMA custodial accounts, custodial IRAs, 529 college savings plans, and education savings accounts (ESAs)

Open Account

Why We Chose It

The Schwab One(R) Custodial Account features the products and services investors expect from this leading discount brokerage firm. Available assets cover most investment products including mutual funds, ETFs, stocks, bonds, and cash. Stock Slices™—or fractional shares—are available to allow broad diversification with smaller amounts of money. The investment research, educational resources, and trading platform make Schwab suitable for all levels of investors.

Pros & Cons

Pros

24/7 phone customer service and branch access
No account fees, no minimums, and no stock or ETF commissions
Investment products, research tools, and screeners for all levels of investors
Custodial accounts can be managed through Schwab’s robo-advisor

Cons

Fees for sophisticated investors might be on the high end

Overview

The Schwab One(R) Custodial account provides a gateway to save and invest for a minor. The breadth of the Schwab platform is open to Custodial Account benefactors, and that includes the screeners and customer service experts in stocks, fixed income, and options.

Pricing is attractive with no minimum opening deposit or maintenance fees. Stocks and ETFs trade commission free, while other investment products have low transaction fees. Parents or grandparents without investment expertise might select the Schwab Intelligent Portfolios robo-advisor to manage the account. This robo-advisor custodial account does not charge management fees and invests the child’s money in a diversified ETF portfolio.

Account opening is easy, with guidance by phone or at a branch. Similar to opening any type of financial account, you’ll need your Social Security and driver’s license numbers. The minor’s name, birth date, and Social Security number are also part of the account opening process.

Best for College Savings : Vanguard

Fees: 0% (0.20% to 0.30% for professionally managed portfolios)
Account Types: UGMA/UTMA accounts, 529 college savings plans, and trusts

Open Account

Why We Chose It

Vanguard is the originator of low-fee index funds loved by passive investors. Along with zero ETF and stock commissions, Vanguard mutual fund investors will find a slate of well-regarded investments available with no transaction fees. Cost-conscious passive investors seeking custodial accounts will find a lot to like at Vanguard, which also offers one of the best 529 college savings accounts around. Vanguard’s educational specialists make creating the college savings account for a minor a breeze.

Pros & Cons

Pros

Educational specialists to guide college saving decisions
Vanguard’s 529 college savings account has low fees and a range of investment choices
Access to many passive and actively managed Vanguard and non-Vanguard mutual funds

Cons

Many Vanguard mutual funds require a $1,000 to $3,000 minimum investment
Sophisticated investors won’t find the trading platform and range of assets available at other brokers
Vanguard Digital Advisor, Vanguard’s robo-advisor, doesn’t cover custodial accounts

Overview

Cost-conscious investors with the Vanguard custodial account can buy and sell thousands of ETFs and 160+ Vanguard mutual funds with no transaction fees. Most other types of investments, including stocks, ETFs, and fixed income securities are available. You can open an account without a minimum investment, although many Vanguard funds require $1,000 to $3,000 to begin investing. If you sign up for electronic delivery, account maintenance fees are waived. Financial advisors and managed accounts are also available for custodial account holders, although additional fees might apply.

Vanguard offers a handy chart to help you choose the best educational savings account for your circumstances. Sign ups are easy at Vanguard and Education Specialists offer guidance for the process weekdays until 8pm ET. To open your account, have your and the beneficiaries personal information, including Social Security number, and bank transfer information available.

Best Robo-Advisor and Best for Research Resources : Merrill Edge

Fees: 0% (0.45% or 0.85% for automated investing)
Account Types: UGMA/UTMA accounts and 529 plans

Open Account

Why We Chose It

Merrill Edge, launched in 2010 along with the merger of Bank of America and Merrill Lynch, is a top competitor in the low fee, self-directed brokerage business. With hundreds of branches opening within Bank of America financial centers, custodial account holders have access to in-person assistance along with plentiful online investment and educational resources.

Pros & Cons

Pros

Live chat and 24/7 customer service
Extensive research, screening, and educational tools
No account management fees or minimum account balance requirement
Merrill Guided Investing, Merrill’s robo-advisor, can be used to manage custodial accounts

Cons

No fractional shares
Other robo-advisors available with lower management fee and minimums

Overview

Custodial account benefactors at Merrill Edge can access Bank of America Global Research to guide their investment decisions. The competitive trading platform and advanced trading tools make Merrill Edge especially useful for sophisticated traders. Beginners and intermediate investors can easily select investments from pre-screened ETFs or use the research and tools to select the custodial account investments. Those who want a range of managed accounts will appreciate the variety of solutions. The Merrill Edge Guided Investing robo-advisor only requires $1,000 to begin and the array of investment strategies.

Telephone customer service is accessible 24/7 and you can open an account within minutes. You’ll need the usual personal information for you and the beneficiary and banking details for fund transfers. All in all, Merrill Edge is a robust platform for custodial accounts and 529 college savings accounts as well.

Best for Educational Content : Fidelity Investments

Fees: 0% ($0, or 0.35% for robo-advisor; 0.50% for advice)
Account Types: UGMA/UTMA custodial accounts, Roth IRA for Kids, 529 plan, Fidelity Youth Account, and trusts

Open Account

Why We Chose It

Fidelity has the typical custodial account and a Fidelity Youth Account, specially designed to educate 13 to 17 year olds, to manage money. You might open the Fidelity Custodial Account and when the child turns age 13, open a Fidelity Youth account, so that when the time comes for the minor to control the custodial account they will have the experience and knowledge to begin handling their own money.

Pros & Cons

Pros

Fractional shares are available for small investors
Fidelity Youth Account for teens to learn money management and investing
Excellent educational content and resources

Cons

High trading fees on mutual funds that aren’t on the no transaction fee list
Fidelity Go, Fidelity’s robo-advisor, doesn’t support custodial accounts

Overview

Account benefactors can access all of the Fidelity investments which include stocks, ETFs, mutual funds, options, bonds, CDs, and fractional shares. Like most financial firms, Fidelity offers commission free stock and ETF investing. Fidelity also offers several zero expense ratio index mutual funds for cost conscious investors. Beginners to advanced benefactors can invest confidently on behalf of the minor using Fidelity’s wide range of tools and screeners. Advanced investors can use the Active Trader Pro® with proprietary tools to enable research, screening, and advanced orders. Other investing accounts for minors include a 529 college savings plan, the Fidelity Youth Account, Roth IRA for kids, and an Attainable Savings Plan (ABLE) for disabled children.

Fidelity has robust educational resources for all levels of investors including webinars, videos and articles. The Fidelity Youth Account is replete with a financial curriculum designed to teach about saving, spending, investing, and money management. The account debit card enables teens to practice sound financial habits.

Custodial account set up requires the usual personal information about the benefactor and the beneficiary, including Social Security numbers. There are no account management fees or minimums at Fidelity.

Final Verdict

Ultimately, starting to invest early for your benefactor is one of the best financial decisions that you can make for your loved one. Custodial accounts standout for the unlimited contribution limit and range of investment assets. Finding the best custodial account for your beneficiary depends on your personal investment expertise, need for guidance, and the assets you wish to invest in. Which account you choose is secondary to beginning a regular process of investing. Take a look around each of the websites and find the best match for your custodial account. Or simply stick with the broker that you already work with, if that makes sense for you.

Compare the Best Custodial Accounts

Company	Account Minimum	Fees	Investments
Charles Schwab Best Overall	$0.00	$0.00 account maintenance	Stocks, ETFs, mutual funds, fixed income, options, futures
Vanguard Best for College Savings	$0.00	$0.00 account maintenance with e-delivery of docs	Stocks, ETFs, mutual funds, fixed income, options, forex
Merrill Edge Best Robo-Advisor and Best for Research Resources	$0.00	$0.00 account maintenance	Stocks, ETFs, mutual funds, fixed income, options
Fidelity Best for Educational Content	$0.00	$0.00 account maintenance	Stocks, ETFs, mutual funds, fixed income, options, forex

Frequently Asked Questions

What Is the Difference Between Custodial Accounts, College Savings Accounts, and Trusts?

Custodial accounts, college savings accounts, and trusts are all vehicles for transferring money to the younger generation, but that is where the similarities end. College savings accounts like the Coverdell education savings account and 529 plan are tax-advantaged savings plans specifically for college and can’t be used for anything else without triggering tax implications. Custodial accounts, as mentioned above, are meant to gift money to a child that they will be able to use however they want when they come of age. While that could mean paying for college, it could also mean a downpayment on a house, a trip to Europe, or a new car. Custodial accounts are irrevocable, so there is no clawing the money back if you disagree with the beneficiary's use of the funds.

Trusts are a more complex instrument and can be used to gift money to any individual or organization, not just children. Each trust is a unique legal entity and can be irrevocable or revocable. Within a trust, you can set limits on the timing and usage of funds. Trusts can otherwise be designed to the benefactor’s desires and have sometimes been used to influence the future choices of the beneficiaries lest they lose access to their trust funds. Trusts are generally more costly to set up due to their potential complexities. Custodial accounts and college accounts are enabled by legislation and follow a standard template and rules, making them much less costly investment vehicles to take advantage of.

Do Custodial Accounts Get Taxed?

Yes, custodial accounts are taxed. For beneficiaries under 19 or under 24 years of age and in school full-time, the first $1,100 earned in the account is tax-free. The next $1,100 is taxed at the child’s tax rate, and any remaining amount is taxed at the account custodian’s federal tax rate.

When Can You Withdraw Money From a Custodial Account?

Money placed in a custodial account is an irrevocable gift. That means it immediately becomes the property of the child who is the beneficiary of the account. The gift givers or custodians can’t simply take money out of the account to use it.

Once the beneficiary reaches the age of majority (usually 18, although it can vary by state), they gain full control over the account and can make withdrawals whenever they wish and for whatever purpose they’d like.12

A custodian may make withdrawals from a UTMA and spend those funds for the benefit of the child, but they must be able to show that the spending was to the beneficiary’s benefit. They have a fiduciary duty to manage the account solely for the interest of the beneficiary.

What Are the Basics and Benefits of Custodial Accounts?

There is no limit on contribution amounts.
Annual gifts greater than $16,000 per individual or $32,000 per couple could incur federal gift tax.
Once the minor reaches the state-determined majority age, the money is turned over to the young adult who retains full control.
Any funds in the account used prior to adulthood must be used for the benefit of the minor.
After the beneficiary controls the account, he or she can use the money for any purpose, not just education like with the 529 college savings accounts.
Twenty percent of the custodial account assets will be considered when the beneficiary is applying for college financial aid.
The account is held and reported to the IRS under the minor’s Social Security number.
Custodial account gifts are irrevocable, so you can’t try to claw back the money no matter the circumstances.

Methodology

We researched 10 companies offering custodial accounts and evaluated each on minimum opening deposit as well as fees, including account maintenance fees, transfer fees, and enrollment fees. We also considered the companies’ history, customer service, and ease of use of the companies’ websites or apps. Lastly, we also looked at the educational resources provided by the different companies. Financial literacy is important for adults and their children who will be taking control of their custodial accounts, usually between 18 and 21 years of age.

Our review prioritized companies with low fees, strong educational resources for adults and children, as well as convenient and easy-to-use platforms.

Best-custodial-accounts-4173051 — Getty Images / KTSDESIGN/SCIENCE PHOTO LIBRARY

Article Sources

Cornell University, Legal Information Institute. "Uniform Gifts to Minors Act (UGMA)."
Internal Revenue Service. "Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)."
U.S. Securities and Exchange Commission. "An Introduction to 529 Plans."
Internal Revenue Service. "Topic No. 310 Coverdell Education Savings Accounts."
Charles Schwab. "What Is a Custodial Account?: Schwab One Custodial Account."
Vanguard. "Fees."
Vanguard. "How to Open Your Account."
Vanguard. "E-delivery: Safe & Convenient Access."
Vanguard. "Which Account Is Right for Your Education Savings Goals?"
Bank of America. "Bank of America’s Merrill Edge Self-Directed Platform Earns Top Honors for Client Experience, ESG Investing and Innovation."
Bank of America, Merrill. "Merrill Guided Investing: While You Manage Life, We Manage Investing."
Fidelity. "Fidelity Youth Account."
Fidelity. "Pricing Fees."
Fidelity. "Decision Making Technology."
Fidelity. "Saving and Investing For a Child."
Internal Revenue Service. "Publication 929 (2021), Tax Rules for Children and Dependents."
Internal Revenue Service. "What's New - Estate and Gift Tax."