Parent guide • Long-term
Custodial accounts for kids
The three account types every parent should know about — UTMA, custodial Roth IRA, and 529 — and which one fits your goals. Plain English, no lawyer-speak.
Not financial advice. This is a general overview. Rules change, state laws vary, and your situation is unique. Talk to a CPA or financial advisor before opening an account.
UTMA (or UGMA)
What it is: A brokerage or savings account in the kid's name, managed by a parent custodian until the kid legally becomes an adult (18 or 21 depending on state).
Best for: General long-term saving/investing with maximum flexibility. The money can be used for anything once the kid ages into it.
Watch out for: The money legally becomes the kid's at the age of majority — you can't change your mind. Also affects financial aid calculations for college (counted as the student's asset, weighted heavier).
How to open: Any major brokerage (Fidelity, Schwab, Vanguard) offers free custodial accounts. Online, 15 minutes, no minimum.
Custodial Roth IRA
What it is: A retirement account for a kid who has earned income. Money grows tax-free forever. Withdrawals in retirement are tax-free too.
Best for: A long-game wealth-building head start. $1,000 invested at age 10 can become $50,000+ by retirement at historical market returns. Few financial decisions have a better return.
Watch out for: Kid must have documented earned income (babysitting, mowing lawns, W-2 job). The contribution can only be up to what they earned that year, maxing out at the annual IRA limit.
How to open: Same brokerages as above. You'll need to document earnings — a simple log of dates, jobs, amounts is usually enough for a kid with under-the-table babysitting income.
529 Plan
What it is: A tax-advantaged education savings account. Grows tax-free, withdrawals are tax-free if used for qualified education expenses.
Best for: College, K–12 tuition (up to $10k/year), trade school, and increasingly, student loan repayment. Also now limited rollovers to Roth IRA under SECURE 2.0 rules.
Watch out for: Penalties (income tax + 10%) on earnings withdrawn for non-education use. If your kid skips college, you have options — but the flexibility is limited.
How to open: Go through your state's plan for state tax deductions, or pick another state's plan if theirs is low-cost (Utah, Nevada, Illinois are popular).
Quick comparison
| UTMA | Roth IRA | 529 | |
|---|---|---|---|
| Use for | Anything | Retirement | Education |
| Tax treatment | Taxable | Tax-free growth | Tax-free growth |
| Contribution limit | None (gift tax) | Annual IRA limit | Gift tax limits |
| Kid needs earned income? | No | Yes | No |
| When kid takes control | Age 18–21 | Age 18–21 | Never (parent stays owner) |
Which should I pick?
Going to college is the plan → 529
Best tax benefits for education specifically. Many states give you a tax deduction just for contributing.
Kid has a job (even casual) → Custodial Roth IRA
The math on 50 years of tax-free growth is staggering. If they qualify, this is the single best account you can open for them.
Not sure what they'll use it for → UTMA
Flexible, simple, no restrictions. Just know the money is legally theirs when they age into it.
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