Should You Invest for Kids in UGMA vs. Brokerage Accounts?

With time on your side, your investments for your child may have more opportunity to grow with the market and give your child a financial foundation by the time they reach legal adulthood. Since children can’t open their own brokerage account or manage investments until they turn 18, parents can help give their kids a head start by managing investments on their behalf.

You can invest for your children through a custodial account, like a UGMA or UTMA account, where account assets are in the child’s name. Or you can open a regular brokerage account in your name that you plan to give your child when they come of age. Either way, you’re managing the investments in the meantime, so how much does it really matter which option you choose?

UGMA and UTMA accounts can offer some tax advantages and protect your child’s money. Taxable brokerage accounts can give you more control and flexibility, but your child’s money could be at risk in certain situations.

How UGMA and UTMA Accounts Work

The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) offer ways for people to give or transfer cash, securities (like investments) or other assets to minors before they’re old enough to own certain assets outright.

Every state has adopted either UGMA or UTMA, and you can set up an account through various financial institutions, such as banks or investment firms. You or anyone else can contribute after-tax dollars to the account as an irrevocable gift to the child. When the minor reaches the age of majority age (e.g., age 18 or 21 in most states), they take control of the account.

Depending on the specifics of the UGMA or UTMA account you choose, you may be able to select individual investments or choose from preset portfolio options based on how aggressive or conservative you’d like your investment mix to be.

UGMA and UTMA benefits

• Tax advantages: Custodial accounts fall under Kiddie Tax rules. In 2025, the first $1,350 in account earnings is exempt from federal tax and the next $1,350 is taxed at the child’s rate. Any earnings over $2,700 are taxed at the parent’s rate.

• Protect child’s ownership: Contributions are irrevocable and become the child’s property, so you can feel confident your gifts will go to your child as intended.

• Keep multiple assets: UGMA accounts can hold a variety of securities, including cash, stocks, bonds, ETFs and more. UTMA accounts have even more options and can be a way to transfer physical property like jewelry, a car or real estate, that a brokerage account may not be able to hold.

UTMA and UGMA drawbacks

• Loss of control: If your plans or finances change, you can’t take the money back. For example, if you have two children and one child’s UGMA account performed much better than the other, you can’t redistribute funds to equalize the gift.

• Impact on financial aid: Student-owned assets, like money in a custodial account, have a bigger impact on reducing eligibility for federal need-based aid for college than parent- owned accounts do.

How Brokerage Accounts Work

By brokerage account, we mean a non-retirement investment account that can hold stocks, bonds, exchange-traded funds (ETFs), mutual funds and other securities.

Standard brokerage accounts don’t offer the tax-deferred growth some retirement accounts do, so you’ll pay any applicable taxes on earnings every year. And, unlike a UTMA or UGMA account, you won’t get the advantage of Kiddie Tax rates—taxes will apply at your own rate.

Brokerage account advantages

• Lower financial aid impact: A standard brokerage account belongs to you, while a UGMA belongs to the minor. The FAFSA counts a smaller percentage of parent assets against federal financial aid eligibility compared to student assets.

• More control: Your brokerage account is fully under your control, allowing you to change beneficiaries or withdraw money on your own schedule. In contrast, gifts to a UGMA or UTMA account are irrevocable.

Brokerage account disadvantages

• Higher taxes: You won’t benefit from the Kiddie Tax advantage UGMA or UTMA accounts offer, and will pay any applicable taxes at your tax rate.

• Divorce and bankruptcy vulnerability: Even if a brokerage account is earmarked for your child’s future, a divorce or bankruptcy court considers it your asset. The account could be divided in a divorce settlement or used to pay creditors.

• Less certainty for gifting: Loved ones, such as grandparents, who wish to contribute money for your child may have to give the funds to you personally, rather than depositing directly into a custodial account. Gifting can have an emotional side, and some grandparents may prefer to give to accounts specifically designated for the child as the beneficiary.

How to Hand Over the Reins to Your Child

However you go about investing for your child, the end result is handing over the reins to your child. Here’s what that may look like, depending on what you choose.

UGMA or UTMA account

With a custodial UGMA or UTMA account, your child takes control once they reach the age of majority (e.g., 18 or 21 in most states, or another age if your state allows you to select an alternate). Often, the account is structured so parental access ends once the child reaches the age of majority. The child may have to contact the financial institution to set up their own account credentials. Your child assumes full control over the money and may use it any way they choose.

Transfer brokerage assets

If you plan to use your own brokerage account to manage investments for your child, you have two options for how to give them the money when they come of age. You can either transfer the investments directly to your child or sell the investments and give your child the cash.

Transferring the investments themselves can help you avoid capital gains tax (because you’re not selling investments). Your child will need to open their own brokerage account so you can transfer the investments into it. If the investments have appreciated, your child will inherit the original purchase price as the “cost basis” to calculate capital gains. So, if you originally invested $5,000 and now it’s worth $9,000, the $4,000 gain will be considered your child’s gains, and they’ll owe any applicable capital gains tax on that amount when they sell the investment.

Sell assets for cash gift

If you decide to sell the investments and give your child the cash, you’ll be responsible for paying any applicable taxes on the sale. You’ll save your child from the tax burden, but you might want to consider how you’ll pay the taxes—whether you’ll deduct the tax amount from the gift or pay it separately from another account.

Gift tax considerations

Whether you transfer the brokerage account or give cash, if your gift exceeds the gift tax exclusion amount ($19,000 in 2025, or $38,000 if married filing jointly), you’ll need to fill out a gift tax form for the IRS. The lifetime limit for gifts is $13.99 million per person in 2025, but it’s set to revert back to $5 million, adjusted for inflation, in 2026. Because the lifetime limit is quite high, you may not need to pay gift taxes, even if your gift is high enough to require a gift tax form.

With a UGMA or UTMA, because the gift becomes the child’s money as soon as you make the contribution, you’ll need to submit any applicable gift tax paperwork for your contributions in the years leading up to your child taking control of the account.

Choosing Between Custodial Account or Parent-Owned Brokerage Account

Ultimately, it’s up to each family to decide which financial tools feel like the best fit. A UGMA or UTMA account can be a great choice to get some Kiddie Tax advantages and ensure that any contributions and gifts end up in your child’s hands, even if other events in your life impact your finances. A brokerage account can be an appealing choice if you want to keep full control over exactly when and how much you want to give your child at a time, or if you want to minimize the potential impact on financial aid.

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