Custodial Brokerage Account for Your Kids
Updated: July 21, 2023
Custodial accounts are accounts for minors (generally those less than 18 years old) set up by parents, guardians, and other adults. Custodial accounts are necessary because they are the only way for minors to enter into any financial transactions (such as opening bank accounts or stock trading accounts).
The two main types of custodial accounts parents use for their kids are custodial bank accounts and custodial brokerage accounts. We will be providing a list of the best custodial brokerage accounts in this article. Establishing a custodial account is just the beginning.
But the real move is to teach your kids how to invest. For more information on this, check out our course: TeenVestor Stock Certification Course. Investing principles learned at an early age will help your kids avoid financial heartaches in the future. The online course teaches teens the fundamentals of investing in the stock market. In the meantime, keep reading for the top custodial brokerage account for kids.
Rules Related to Opening Custodial Accounts
A custodial account is held with an adult as the custodian, but in the eyes of the law, the assets in the account belong to the child and are held in his name. The child, however, can’t get his hands on the account’s assets until he reaches his majority – 18 years old in some states and 21 in others.
The custodian who establishes the account – typically a parent, grandparent or other relative – has management responsibility over the account. In other words, the custodian must be involved in all decisions to buy or sell securities or reinvest earnings generated by the account, even though the investments in the account belong to the minor. The beauty of establishing a custodial account is that part of the earnings and gains in the account are taxed at a low rate on the average.
Before Opening a Custodial Account
Before opening a custodial account, you should:
Choose online brokers that offer affordable custodial accounts (more on this below);
Understand the advantages and disadvantage of custodial accounts;
Understand taxes associated with custodial accounts for your kids; this is an often ignored aspect of custodial accounts.
Criteria for Choosing a Custodial Brokerage Account
To open a custodial account to help your kids start investing, you first have to choose an online broker that allows affordable custodial accounts suitable for teens. These types of accounts are called custodial brokerage accounts.
The things you have to look for when searching for an online broker include:
No stock trading fees – you should find online brokers that charge $0 to buy and sell stocks.
Low balance stock trading accounts – make sure the online broker does not require the maintenance of a sizeable minimum balance in a trading account; there are many that offer $0 minimum balance.
Brokers that allow for fractional shares – if your Teenvestor (teen investor) wants to invest as little as $5 in reputable companies with high stock prices, he can only do so if the online broker allows him to buy fractions of a share stock.
Top Ten Custodial Brokerage Accounts
Here is a short list of the top 10 affordable custodial brokerage accounts brokers that are best for your kids. I've linked directly to each company's custodial account section:
Charles Schwab (Which Now Owns TD Ameritrade)
Robinhood and Webull are conspicuously missing from this list for one simple reason — they don’t offer custodial brokerage accounts. For more details about each of these accounts, please go to the bottom of this page.
Newer Companies That Offer Custodial Brokerage Accounts
You can see that some of the companies (line items 1 to 5 above) are traditional online brokers that have been around for a long time. The other companies (line items 6 to 10) are newer online brokers, some of which were formed just in the past 5 years.
These new companies (especially Greenlight, Loved Investing, and Stockpile) , are specifically marketed to parents who want to easily establish custodial accounts for their kids. They designed their apps specifically to 1) attract parents who want to establish custodial accounts to help teach their kids managing money, and 2) attract young people who want to save and invest.
Some of these new custodial brokerage accounts charge a small monthly fee for helping young and new investors put together an investment portfolio or set up very simple investment strategies.
Information You Need to Open Custodial Accounts
Opening a custodial account with online brokers is very simple. The basic information you will need to open up a custodial account are as follows:
The contact information, birth date, and Social Security number of your child.
Your driver's license number (if you have one).
Your Social Security Number.
Your employer's name and address (if applicable).
Bank information so you can move money into the custodial account if and when necessary.
UGMA and UTMA Accounts
There are two types of custodial accounts: the UGMA (named for the Uniform Gifts to Minors Act) and the UTMA (named for the Uniform Transfers to Minors Act).
These two types of accounts are very similar in nearly all respects. The most significant difference between the two is the date at which control of the account passes to the child. A custodian loses control over an UGMA account once the child reaches his majority – 18 or 21, depending upon the state. By contrast, a custodian is permitted to postpone transfer of control of an UTMA account to a child, depending upon the state, until 25.
Whether you establish an UTMA or an UGMA account, these accounts have very strict rules that prevent custodians from using them as their personal piggybanks. Furthermore, while you can withdraw money from the account for your child’s benefit, the assets in an UGMA account can’t be used to pay for things that you are legally obligated to provide to support your child (such as food, clothing, etc.). However, UTMA accounts are more liberal than UGMAs in that they permit funds in the account to be spent for the support of the child.
Disadvantages of a Custodial Account
Criticisms of custodial accounts for children generally fall into three categories.
First, even though you may have contributed to the custodial account to help your child get started as an investor, the assets belong to him. This means that if you wish to close the account and reclaim the assets, you may not only end up paying taxes at your own tax rate on the gains in the portfolio, but you may also find the IRS scrutinizing your actions.
Second, custodial accounts raise thorny issues of “control.” Some parents worry that their Teenvestor, upon reaching his majority, will squander the account’s assets once he assumes control of the account. Finally, substantial assets in custodial accounts can reduce a college-bound Teenvestor’s eligibility for financial aid or cause tricky estate tax problems if the custodian dies before the child reaches his majority.
Advantages of a Custodial Account
Custodial accounts offer substantial advantages, which we believe outweigh the disadvantages discussed above.
The most important advantage of a custodial account is that it enables your Teenvestor to learn how to invest responsibly, early in life, under your supervision. In addition, use of a custodial account will protect more of your Teenvestor’s investment income than if he did not have such an account.
This is because, as owner of the assets in the account, some of the investment income generated by the account will most likely not be taxed at all, or will be taxed at his rate. We recommend that you keep the balance in the custodial account modest to minimize concerns such as the adverse tax consequences associated with account closures, loss of custodial control over account assets, reduced financial aid or increased estate taxes.
Are Your Kids Ready to Invest?
Are They Ready to Invest? Take our quiz by clicking on the image.
Some kids may not be ready to leap into stock investing. We recommend waiting until they are in their teen years before introducing them to investing. This way, they will be mature enough to truly appreciate the potential risks and rewards of investing in the stock market., How would you know if your kids are ready to become stock investors? It depends on the lessons they have already learned up to this point. Have they shown any skills in handling money, no matter how small the amount is at their disposal?
Parents who can afford to do so can help their teens manage money by giving them a regular allowance, no matter how small their budget. I emphasize providing allowance on a fixed schedule to help them plan for long-term expenses and things they may want to buy.
By providing allowance on a fixed schedule, you help them think about the future and refrain from immediately craving gratification. Your kids can’t plan for future expenditures if they are unsure when they will receive their allowance. You may also want to consider tying allowance to chores around the house. I discourage parents from paying for tasks their kids should be doing anyway, such as cleaning up their room or the bathroom they use. These chores should be tasks above and beyond what you would typically expect of your teen. Overall, basic money management skills, including the ability to save (through a bank account), are precursors to your kids beginning their investing journey. Here is a quiz to help determine if your kids are ready to invest in the stock market.
7 Steps to Investing as a Teenager
Before your teens can begin investing through custodial accounts, they should consider the following 7 steps which we further describe in this link:
Gain Basic Knowledge -- go to sites that specialize in teaching teens about stocks basics (see: www.teenvestor.com)
Stick to Their Interests at the Beginning -- looking for companies that suit their interest will keep them engaged; later, they can expand your investment universe.
Find out Exactly What Companies Do -- they should know the business in which their company of interest is engaged; get company annual reports.
Get Basic/Simple Financial Data -- getting and basic financial measures will help them avoid serious investment mistakes; finance.yahoo.com is helpful.
Experiment With Dummy, Mock, Virtual, or Fake Portfolios -- several companies offer free dummy trading portfolio platform to help them step gently into stock investing without risking their money; here is the link to how to set up a dummy portfolio.
Choose an Appropriate Online Broker (Offering Custodial Accounts) -- online brokers with no fees and no minimum are ideal; here is alink on online brokers.
Avoid Scams-- stay away from penny stocks or anyone who promises returns that are too good to be true.
Practicing With a Dummy Stock Portfolio
Setting up a dummy trading portfolio (also called a mock or virtual portfolio) is one way Teenvestors can overcome the fear of taking that first step in investing. Using fake dollars and virtual stock market simulators that pull stock prices from the real market, young investors can get a taste of the ups and downs of the stock market.
TeenVestor’s Dummy Portfolio Portal
MockPortfolios.com is our free portal for teen investors can create their own dummy trading portfolios so they can start buying and selling stocks using virtual dollars.
Before they can create their own dummy portfolios with MockPortfolios.com, they have to join one of the stock competitions we’ve created within the game’s platform. Each competition has its rules and regulations about what type of stocks they can buy, the amount of initial virtual cash they can play with, etc. Click on the image below for MockPortfolios.com.
Other Dummy Portfolio Portals
Some of the dummy trading portfolio portals we are familiar with are as follows:
MarketWatch Virtual Stock Exchange
TD Bank’s Virtual Stock Market
Online Stock Courses
After opening a custodial investment account but before seeding the account with cash, you should consider having your kids take a stock investment course. There are many courses offered on the Internet to teach stock investing. You can find them at sites like Udemy, LinkedIn Learning, Coursera, and many others.
However, you will not find any that are specifically designed for teens and that is comprehensive enough to give young investors the basic skills they need to begin investing in stocks. Many of these courses, even the beginner courses, are too advanced for very young investors.
Some online brokers have developed programs on their sites to teach basic investment concepts but once again, these are inadequate mainly because they are too advance for kid investors.
An excellent program for teaching kids stock investing is the TeenVestor Stock Certification Course. Designed for kids ages 13, this self-paced course uses text, video and audio lessons to teach the basics of stock investing.
Teen Investors and Taxes
An in-depth discussion of the tax rules that apply to your Teenvestor’s investment activities is certainly beyond the scope of this document. However, it’s important that you know about the basic tax rules that govern when an income tax return must be filed for your Teenvestor.
As a parent, you should monitor the amount of income that your Teenvestor receives. The IRS defines investment income (also known as unearned income) as the combination of interest, dividends and capital gains. Investment income should not be confused with earned income, which includes salaries, wages, taxable scholarships and grants. Let’s examine three circumstances when your child receives 1) only unearned income 2) only earned income, and 3) both unearned and earned income. The IRS describes the circumstances under which your child must pay taxes in the following publication: Publication 929.
If Your Child Receives Only Unearned Income
In most instances, your Teenvestor, as a single dependent, will not be required to file or pay taxes on the first $1,100 of investment income (i.e. unearned income). However, once his investment income exceeds $1,110 he must file a tax return or, as discussed below, you may choose to include his investment income on your own tax return.
This unearned income will be reported on his tax return, and the amount owed will be calculated on Form 8615, which is to be attached to his return.
The truth is that it is very unlikely that your Teeevestor will make more than $1,100 in unearned income because that would take a lot of investments to make such profits in any assets like stocks and bonds. In addition, this type of income is generally recognized when stocks and other assets are actually sold. So, if your Teenvestor invests in stocks but does not sell it, there is no unearned income associated with that investment. Sure, he may get dividends on stocks, but that will most likely be a tiny amount.
Parents can elect to include the investment income of their Teenvestors who are under 19 years of age (or under age 24 if the child is a full-time student) on their own returns. Parents can make this election if their Teenvestor’s investment income is more than $1,100 and less than $12,400. If you elect to report this income on your own tax return, your Teenvestor won’t have to file a separate return. A parent’s tax return that includes the investment income of children must be accompanied by a completed Form 8814.
If Your Child Receives Only Earned Income
Your Teenvestor has to file a tax return if his earned income is more than $12,400. Some tax experts recommend that they file a tax return anyway if he makes less than this amount since he may be able to get money back if too much tax has been withheld.
If Your Child Receives Both Earned and Unearned Income
Gross income is used to determine whether your Teenvestor has to file a tax return when he has both investment income and earned income. Gross income, also known as “before-tax” income, is loosely defined as the total of earned income and investment income before any deductions for taxes are taken. Tax returns are required to be filed if your Teenvestor’s gross income for the year exceeds the greater of a) $1,100 or b) his earned income plus $350, up to a total of $12,400.
Once your Teenvestor’s earned income (typically, wages from employment) exceeds $12,400, a tax return must be filed regardless of whether he has any investment income. In addition, if your Teenvestor does not have any investment income and is self-employed – that is, if he is an entrepreneur – he will have to file a tax return if his net profit exceeds $400.
Determining the Appropriate Tax Bracket (Includes the Kiddie Tax)
Obviously, understanding when your Teenvestor is required to file a tax return is just one piece of the puzzle. It is also important to understand how to figure the tax rate that will be applied to his investment income.
Your Teenvestor is required to pay taxes on investment income exceeding $1,100. The tax rate that will apply to this income depends upon whether your Teenvestor is younger than 19 or not. If he is under 19 and has investment income, he is subject to the kiddie tax. Technically speaking, the kiddie tax is not actually a tax but rather a restriction that seeks to prevent parents from transferring their investment assets to their children under 19 to shield their income from taxes.
Under the kiddie tax, investment income over $1,100 and up to $2,200 will be taxed at your Teenvestor’s tax rate. For most Teenvestors, this should probably be 10%. Any investment income over $2,200 will be taxed at the parent’s tax rate
Details of the Top 10 Custodial Brokerage Accounts
1. Charles Schwab (Now Owns TD Ameritrade)
Charles Schwab is ideal for beginner investors and investors in search of no-minimum index funds. Charles Schwab has a $0 account minimum, $0 maintenance fees, and a $0 commission for stock and ETFs (Exchange-Traded Funds (ETFs). This makes it ideal for both active traders and testing-the-waters investors.
Individuals with Charles Schwab custodial accounts gain access to over 4,000 non-transaction fee mutual funds with low expense ratios of 0.50% or below.
In addition, Schwab offers quite a few trading platforms, including StreetSmart Edge, StreetSmart Central, and Schwab Mobile apps.
While this all sounds like the perfect deal, Charles Schwab falls short on sweep rates and charges high fees for mutual funds. Furthermore, you can only trade assets available on Canadian and US exchanges. International versions of Schwab require a minimum deposit of $25,000. However, this is not important for kid investors.
Pros
● Offers fractional shares
● No minimum open deposit
● No maintenance fees
● No online stock and ETF commissions
● Reputable company with a long history
● Brilliant research and data
Cons
● Doesn't allow cryptocurrency trading
● High fees for some mutual funds
● Uninvested cash is transferred into an account paying 0.01%
2. E*TRADE
E*TRADE is among the most popular online brokers, and it's easy to see why. Alongside the company's $0 commission, it also offers powerful trading platforms (E*TRADE Web and Power E*TRADE) and exemplary educational resources. Plus, it has a large mutual fund and investment selection.
Unfortunately, E*TRADE only covers US markets and doesn't accept electronic wallets and credit/debit cards for money transfers, making the gifting process quite a pain. If you want to trade via debit, you'll have to use the Apple Pay app.
With that said, E*TRADE excels in a ton of other aspects. For instance, it doesn't charge any transaction fees on more than 1,300 no-load mutual funds.
It also has a minimum investment of $0 and a stock trade of $0. However, there's still a $0.65 contract fee for options, which is reduced to only $0.50 for 30+ trades per quarter.
Pros
● Multiple account types for investments
● Commission-free trading
● Intuitive app
● Professional-grade trading tools
Cons
● Does not offer fractional shares (except for dividend reinvestments)
● Directed towards active traders
● Bank and Apple Pay transfers only
● Doesn't allow Foreign Exchange (forex) trading
3. Fidelity
Founded in 1946, Fidelity is a reputable US discount broker regulated by well-known financial authorities like the FCA (Financial Conduct Authority) and the SEC (Securities and Exchange Commission).
The company covers a ton of tools and offers in-depth trading ideas data alongside premium research. Fidelity gives you access to multiple resources to help you invest wisely and with the least risk possible.
When you log into your account, you’re given thorough investment analysis and reports from some of the biggest stock organizations in the world.
Fidelity offers no account fees, no account minimum, and commission-free stock. Like Charles Schwab, it has an expense ratio of 0.50% or less on its mutual funds.
There is an innovative account for kids between the ages of 13 and 17 offered by Fidelity called the Fidelity Youth Account. This account can be opened by parents who already have a Fidelity brokerage account. With the account, kids can more easily make trading decisions while their parents are given the ability to monitor their activities.
Pros
● Offers fractional shares and options trading
● No minimum open deposit
● No maintenance fees
● No online stock trading commissions
● Fantastic platform
● Stock research from 20 third-party providers
Cons
● Expensive broker-assisted trade fee (~$35)
● Doesn't have forex trading options
4. Interactive Brokers
Interactive Brokers (IBKR) is one of the biggest multinational brokerage firms in the US. It's the ideal online trading solution for professional and active traders who frequently make use of tools and research.
IBKR focuses on services that offer flawless trade execution, broad market access, and low costs. It's among the only firms that allow individuals to trade stocks, bonds, funds, futures, forex, and options from a single account. Its asset classes extend to 135 markets across 33 countries and accept clients from over 220 countries.
Opening an IBKR account doesn't require any minimum fees. However, it charges a fee of $0.005 per share for Pro Platinum and a 1% share for trade value. IBKR Lite charges nothing.
Pros
● Offers fractional shares
● No minimum open deposit
● No maintenance fees
● No online stock trading commissions
● Global offerings and trade options
● Fantastic trading tools
● Fairly low margin interest rates
Cons
● Not as suitable for beginner investors as the other companies on this list
5. Ally Invest
Ally Invest offers several trading benefits, including commission-free stock and ETF trades, low contact fees, and forex trading.
Custodial clients get the same advantages as other Ally Invest customers, including mutual funds, closed-end funds, options, and more.
To add, the company doesn't ask for custodial account fees or minimum deposits. However, options security carries per-contract fees at the cost of $0.50.
If you don't have time to manage your investments, you can actually hire a robo-advisor for $100.
Pros
● Offers fractional shares
● No minimum open deposit
● No maintenance fees
● No online stock trading commissions
● Strong web-based platform
● Decent selection of research and tools
● Commission-free stock and ETF trades
Cons
● Oddly enough, it lacks proper 2-step authentication
6. Greenlight
The Greenlight Card is a prepaid debit card children can use.
Although the card technically belongs to your child, you have complete control of their spending and savings. The Greenlight application gives you real-time notifications every time your child spends money using the card.
Greenlight Invest, as the name suggests, allows you and your child to invest in stock with the help of the company's investing platform. Of course, only you can approve of every trade. Subscription fees range from $5 to $10 per month.
Pros
● Intuitive but easy-to-understand investing platform for kids
● Savings reward of up to 2% on balances over $5,000
● Cashback on debit card purchases
● Strict parental controls
Cons
● High fees
● Can't deposit physical cash
7. Bloom
Bloom is a convenient investing platform that offers commission-free custodial accounts for anyone under the age of 18. You can start investing with as little as $1 and build a portfolio based on the thousands of companies, themes, and goals the company offers.
Compared to other investing platforms, Loved focuses on education and growth. The company not only offers investment tools but also educational resources for financial growth. It teaches both you and your child how to invest and save for his or her education and future.
Pros
● Offers fractional shares ( you can buy shares for as little as $1)
● Minimum deposit of only $5
● No maintenance fees
● Allows you to invest without commission
Cons
● Founded in 2017, which doesn't give it a long track record
● Isn't as in-depth as other investment platforms
8. Stockpile
Founded in 2010, Stockpile is an online digital brokerage that offers both custodial and brokerage accounts.
Thanks to its intuitive application, setting up a custodial account on Stockpile is as easy as can be. Simply download the application and select the "add account" option from the sidebar menu, where you'll see the option that says "custodial (adult)."
Fill in the required information and voilà! You're all set. Once the account is up and running, the beneficiary can check the account anytime to see how his or her stocks are doing by inputting their username and password into the app.
In terms of convenience, Stockpile reigns on top. Gift-giving is incredibly easy with its Stockpile electronic gift card, allowing you to transfer funds between $5 to $2,000. You can also choose a redeemable print-at-home gift card or mailed gift card.
If you're not a big fan of gift cards, you can instead buy stock using your debit or credit card. However, each transfer comes with a $3 fee.
Unlike other brokerage platforms, Stockpile charges you per trade. After paying the initial fee of $2.99, you'll only have to pay $0.99 for each additional stock.
Pros
● Over 1,000 stocks and ETFs to choose from
● Gift cards for stocks
● Easy account setup
● No minimum or annual fees
Cons
● You are charged per stock trade ($2.99 for initial trade and $0.99 for subsequent trades)
● Limited account selection; doesn't offer IRAs or joint accounts
● No real-time trading
● Available for US residents only
9. Stash
Stash makes investing straightforward and accessible through its personal finance app. Through its simplified platform, Stash is best suited for beginners looking to grow a large investment in the future.
Founded in 2015, Stash has upwards of five million users and $2.5 billion in assets in management. It has an account minimum of $0 and management fees of $1 to $9 per month, depending on the package you choose.
Investment expense ratios range from 0.16% to 0.25%. Although it doesn't have an annual or inactivity fee, it has a $75 outgoing transfer fee.
Compared to its competitors, Stash offers incredibly high fees. Even so, it offers a lot in exchange, including Stock-Back rewards programs, thematic and mission-driven directions, and automated features that invest in your behalf.
Pros
● Easy-to-use account
● Automatic investments
● Zero account minimum
Cons
● High subscription fees
10. Acorns
Acorns is a fairly new company, recently founded in 2014. Despite that, it has over 8 million customers and $3 billion assets under its belt.
Acorns specialize in robo-investing and micro-investing, both of which are lost-cost investing approaches that suit a ton of investors. It uses the power of algorithms and highly advanced software to build your ideal investment portfolio.
Acorn's robo-adviser charges a maximum fee of around 0.25% of your assets, which is significantly less than that of a human financial advisor.
If you'd rather manually choose your investments, Acorns may not be the right platform for you. It's best suited for hands-off investors who are interested in outsourcing portfolio management.
At a flat fee of $5 per month, custodial accounts in Acorn allow you to add multiple users at no added cost. Additionally, you can manually set up automatic recurring investments and take advantage of the dozens of educational resources found on the website.
Pros
● Offers a full financial wellness system
● Easy to set up custodial accounts
● No account minimum
Cons
● Management fees might be too costly for low-balance accounts
Final Thoughts
Custodial brokerage accounts are a great way to secure your children's financial future. The platforms listed above are brilliant investing options at affordable prices.
Most of these companies require a minimum deposit of $0 to $5 dollars and expense ratios of 0.50% or less for mutual funds. So, what are you waiting for? Open a custodial account for your child today!