Brokers With Custodial Accounts
Many adults decide to open a custodial account for a minor as a means of improving their financial prospects in the future. These accounts usually bring significant benefits to the named individual on the account. This guide will cover what custodial accounts are, the advantages and disadvantages of having one, and how to choose the right brokerage. We have also compiled a list of the best brokers with custodial accounts in 2024.
Best Custodial Accounts
These 2 firms offer the best custodial accounts based on joining requirements and investing conditions:
#1 - M1 Finance
Why We Chose M1 Finance
M1 Finance is a US brokerage that allows users to build a customizable investment portfolio from a range of 6000+ stocks and shares, ETFs and cryptocurrencies. The innovative 'pie' based portfolio management system allows traders to build several portfolios with different aims, and the brokerage supports machine-learning tools that can provide automated portfolio management.
"M1 Finance remains a great choice for US investors who want a straightforward, commission-free way to invest in stocks and crypto. The intuitive dashboard, customizable portfolios and fractional shares should appeal to all experience levels and investing goals. "- DayTrading Review Team
- Instruments: Stocks, ETFs, OTC stocks
- Regulator: SEC, FINRA
- Platforms: Own
- Min. Deposit: $100
- Min. Trade: $1
- Customizable 'pies' allow investors to curate their own ETFs
- The broker delivers a clean and easy-to-use dashboard that illustrates the current composition of your portfolio
- The range of 6000+ stocks and ETFs is highly competitive
- The way trades are placed puts transaction timing out of your control
- Accounts with less than $20 and no trading activity for 90 days are charged a fee
- You cannot consolidate external accounts for planning purposes
#2 - Firstrade
Why We Chose Firstrade
Firstrade is a US-headquartered discount broker-dealer with authorization from the SEC. The company is also a member of FINRA/SIPC. With welcome bonuses, powerful tools and apps, plus commission-free trading, Firstrade Securities is a popular online brokerage. It is also quick and easy to open a new account.
"We recommend Firstrade for beginner investors looking to trade US stocks with no commissions. There is a wealth of free education plus premium-quality research and trading ideas from Morningstar, Briefing.com, Zacks and Benzinga."- DayTrading Review Team
- Instruments: Stocks, ETFs, Options, Mutual Funds, Bonds, Cryptos, Fixed
- Regulator: SEC, FINRA
- Platforms: Own
- Min. Deposit: $0
- Min. Trade: $1
- Low OTC fees
- Accepts US traders
- Commission-free investing
- No copy trading
- No forex or futures trading
- No 24/7 customer support
What Is A Custodial Brokerage Account?
The definition of a custodial account is a financial account that an adult opens for someone who is under the age of 18. Usually it is opened for a child by a parent or grandparent for their grandchildren, but any adult can open a custodial account for a minor. Transactions and trades made through this account need to be approved by the custodian in advance.
A custodial account essentially refers to any account that is maintained by a responsible party on behalf of another, meaning that it can also come in the form of a retirement account set up for employees by employers. The responsible party is legally required to act only in the best interest of the beneficiary, meaning that any investments should be low risk with the intent to grow the account over time.
Alternatively, the account can be used simply to deposit funds into, with no investments ever being made. In general, the account can be managed in any way that the account manager wishes.
How Custodial Brokerage Accounts Work
Custodial accounts can be either savings or investment accounts, and tend to be held by banks, mutual fund companies, or online brokerages.
Once the legal age of adulthood has been met, the recipient of the account automatically gains full control over it and can decide what is to be done with the funds. The legal age of adulthood varies state by state in the US, or by country globally.
Once a custodial account has been opened, it functions just like any other account that is held with a broker. The custodian is the manager or advisor of the account, and they decide how the money is invested. The custodian or any other party can also contribute funds to the account.
Brokers with custodial accounts allow investment in all kinds of assets. However, more speculative investments such as trading on margin or buying futures and derivatives are unlikely to be approved by the institution holding the account due to their risky nature.
Types Of Custodial Accounts
There are two key kinds of custodial accounts:
- The Uniform Gift to Minors Act (UGMA)
- The Uniform Transfers to Minors Act (UTMA)
The biggest difference between these accounts is the assets that they cover. While the UGMA account includes stocks, bonds, and mutual funds, and is limited to financial assets, a UTMA also allows you to include other assets like art, real estate, and other personal possessions. Note that the UTMA is not allowed in South Carolina in the US, but all other states allow both.
Both kinds of accounts are set up in a minor’s name by a custodian who decides what is done with the funds until the child reaches legal adulthood. Parameters such as the initial investment amount, the minimum balance for the account, and the interest rate on the account are set by the company or brokerage that the custodian opens the account with.
Custodial Accounts Vs College Savings Accounts & Trusts
Custodial accounts, college savings accounts, and trust funds can all be used as means of transferring money to a young person for their future financial security. In terms of their features, there are some key differences between each of these account types.
College savings accounts are tax-advantaged savings plans that are set up specifically for higher education. To use funds from these accounts for any other means would have significant tax implications.
Trust funds are used to gift money to an individual or organization, and therefore they are not restricted to children. Each trust is unique, which means that its rules and regulations can vary widely.
Any limits on how and when the funds are used are set by the party that opens the account. Trusts are highly complex to set up and arrange in comparison to college savings accounts and custodial accounts, which follow the same broad structure.
Custodial accounts, on the other hand, are designed to gift money to the minor named on the account. This money can be used for higher education, but it can also be used for anything else. It’s worth noting that brokers with custodial accounts do not allow the account manager full control over the funds: the deposits are irrevocable and cannot be requested back under any circumstances.
Pros Of Custodial Accounts
There are many advantages to opening a custodial account for a minor:
Custodial accounts come with tax advantages in the US, despite not being tax-deferred. Even though the minor on the name of the account is not the one contributing money to it, the child is considered by the IRS as the owner of the account because they are the one receiving the money.
This means that a certain portion of the money in the account is taxed at a child’s rate. This works for children under the age of 19 (or 24 if the child is studying full time), who can file for unearned income on their parent’s tax returns. The first $1,100 of this is not taxed at all, and the next $1,100 is taxed at a 10% rate. Anything above $2,200 is taxed at the rate of the parents.
Individuals can add up to $15,000 to an account without the federal gift tax being placed on it.
The custodian of the account is allowed to withdraw money from the account as long as the money is being used “for the benefit of the minor”. However, the list of acceptable causes to spend money on is not specifically listed.
This means that while this rule usually refers to the money being used for university education, there is nothing to stop the custodian from using the money for housing, clothing, or any other necessity, as long as it is spent on the minor in question.
No Income & Contribution Limits
There is no limit to how much money can be put into a custodial account, and nor is there any rule that says contributions have to be made on a regular basis. This means that funds can be placed into the account as a lump sum, or deposited at a regular frequency of the custodian’s choosing, for example monthly, bi-monthly, or yearly.
No Fees For Withdrawing Funds
Taking funds out of a custodial account does not incur any fees. This means that if money is needed to cover some kind of expense for the minor, it can be withdrawn without a penalty.
Cons Of Custodial Accounts
While many factors make brokers with custodial accounts beneficial for minors, there are also some drawbacks:
Reduced Financial Eligibility
Even if you are too young to access the funds, having a custodial account in your name still counts as “holding assets.” This means that these funds are taken into account when calculating eligibility for tuition fee financial aid, as well as government aid and community aid.
Deposits made to the account cannot be reversed; all of the funds pass to the minor when they reach the legal age of adulthood. This is different from other kinds of savings accounts for minors, which allow those who set the account up to continue to control the funds.
Beneficiary Cannot Be Changed
Unlike other account types, the beneficiary of a custodial account cannot be changed. This is because the account is set up in the minor’s name, and therefore it cannot be transferred to anyone else. If the minor named on the account passes away, all funds in the account automatically become a part of their estate.
How To Choose Brokers With Custodial Accounts
Here are some of the key things you should look for when choosing a broker for your custodial account:
Make sure you only opt for brokers with custodial accounts that are trustworthy and reputable. This starts with checking that they are regulated and what jurisdiction their license is valid in.
It’s also essential that the broker has good customer service that is readily available in case you have any questions regarding your account.
High fees can have a significant impact on accessing funds. It’s important that minors can access as much of their money as possible without needing to spend large amounts of their capital on fees.
There are many brokers out there with no fees on custodial accounts, so it is best to opt for one of these. The exception to this rule is if you want to pay someone to handle most of the account management for you. In this case, you can pay a higher fee for a robo-advisor instead, and take a more hands-off approach.
If you are planning to make investments using the funds, the broker you choose should have a wide range of assets available. You need a brokerage that enables you to choose a mix of assets to create a balanced and low-risk portfolio for the child on the account.
If an account seems like it has very few assets on offer for custodial accounts, then it is better to choose a different brokerage.
How To Open A Custodial Account
Now that you’ve chosen a broker for your account, it’s time to set it up. The majority of companies allow you to open your custodial account online, which is a quick and easy way of completing the process. Before you begin, ensure that you have these essential items to hand to make the process as smooth as possible:
- The name, birth date, and social security number of the minor on the account
- Your driver’s license number
- Your social security number
- Your banking information
- The name and address of your employer
How To Invest In A Custodial Brokerage Account
Once you have opened a custodial account, it’s time to start investing the money that’s in the account. Typically, custodians will invest on behalf of the minor, and that means finding ways to make low-risk investments while still making profits for the long-term benefit of the account.
Try to choose assets based on their long-term growth potential, rather than on their short-term fluctuations.
It pays to be cautious: some stocks are too risky, even as a long-term investment. It is also a good idea to balance riskier stocks with more stable assets such as gold and bonds so that the portfolio is more balanced. Index trackers are also popular.
Reviews: What Brokers Offer Custodial Accounts?
Below are some of the top brokers with custodial accounts based on their fees, customer service, assets, and other features:
- Offer mutual funds, ETFs, stocks, bonds, futures, and cash
- Stock slices (fractional shares) are available for more diversification
- No custodial account fees, no minimums and no stock or ETF commissions
- 24/7 customer service access
- Robo-advisor available
- Covers a mix of ETFs
- No account minimum
- Established robo-advisor account
- Flat fee of $5 per month to keep the account open
- Great range of educational resources
- Access to both passive and actively managed accounts
- No transaction fees and zero commissions on ETFs and stocks
- Covers ETFs, stocks, fixed income options and mutual funds
- Customer support in the form of educational specialists to help with decision-making
- $20 fee to open a brokerage account, which will be waived if you sign up for e-delivery of documents
- Robo-advisor available
- 24/7 customer service is available including live chat
- There is also an extensive database of educational tools
- No account management fees or minimum balance requirements
- Promotion offered of up to $600 when you invest in a new Merrill Edge Self-Directed account
- No fee for account management
- Receive a $50 reward once the beneficiary activates their Youth Account
- Covers stocks, ETFs, mutual funds, fixed income options and forex
- Specific money management resources aimed at young adults
- 24/7 customer support available via phone, email and live chat
Final Word On Brokers With Custodial Accounts
Brokers with custodial accounts allow adults to open a savings account on behalf of a child, with the adult managing it until the child is legally an adult. Managing the account means making investment decisions and deciding how the funds are going to be spent, as long as these decisions benefit the minor.
Opening a custodial account comes with several advantages including tax breaks, but there are also some drawbacks such as the impact on financial or government aid eligibility. Once you have chosen the right broker for you, it’s an easy and seamless process to open a custodial account.
When managed correctly, brokers with custodial accounts can be highly beneficial to minors later in their lives. Always make sure to choose a brokerage that is regulated and trustworthy before you deposit any funds with them. See our list of recommended brands to open a custodial account today.
How Do Brokers With Custodial Accounts Work?
Custodial accounts are like savings accounts that an adult custodian sets up on behalf of a minor. All decisions about the funds in the account must first go through the approval of the custodian. Once adulthood is reached, the beneficiary gains full control of the account.
Can You Take Money From A Custodial Account?
Custodians can withdraw money from the account as long as it is being spent on something that benefits the minor, for example, education, housing, or clothing.
What Happens When The Beneficiary Of A Custodial Account Turns 18?
At the legal age of adulthood in that particular state or country, control of the account is automatically transferred to the child.
How Can I Open A Custodial Account?
As a minor, an adult must open a custodial account for you. They will be in charge of the account until you reach the legal age of adulthood, at which point the management and funds are automatically transferred to you.
What Is The Taxation Of Brokers With Custodial Accounts?
Minors have their custodial accounts registered on their parent’s or guardian’s tax returns. This means that, in the US, the first $1,100 is tax-free, and the next $1,100 is taxed at 10%. After this, the funds are taxed at the tax rate of the custodian.