How to Open a Stock Account for a Minor: Custodial Types and Taxes

To open a stock account for a minor, an adult sets up a custodial brokerage account and manages the investments until the child reaches the age of majority. Minors can’t legally enter binding financial contracts, so every brokerage requires an adult custodian — usually a parent or grandparent — to apply on the child’s behalf.¹ The child owns the assets from day one; the custodian controls trading and withdrawals until the account transfers. Online, the whole application takes about 15 minutes once you have your documents ready.

Pick the Right Type of Custodial Account

Three account types cover almost every situation, and choosing among them shapes what you can hold, how earnings are taxed, and when the child gains control.

UGMA

A Uniform Gifts to Minors Act account is the simplest option and available in every state. It holds cash, stocks, bonds, and mutual funds without a formal trust.² Once you deposit money or transfer securities, the gift is irrevocable. You can’t pull the funds back for your own use later. The assets legally belong to the child.

UTMA

The Uniform Transfers to Minors Act expanded the UGMA framework to cover a wider range of property, including real estate, fine art, and patents.² For a straightforward stock account, UGMA and UTMA function almost identically. The distinction matters if you want to move non-financial assets into the account. Not every state has adopted UTMA, so your brokerage may offer one, the other, or both depending on where you live.

Custodial Roth IRA

If the child has earned income from a job — babysitting, lawn mowing, a W-2 role — a custodial Roth IRA opens up. For 2026, the contribution limit is $7,500 or the child’s total earned income for the year, whichever is less.³ Most teenagers earn below the standard deduction, so paying no tax on contributions today and withdrawing tax-free in retirement is a hard deal to beat.

Contributions can come out at any time without penalty, and the IRS waives the 10% early withdrawal penalty on earnings used for qualified higher education expenses.⁴ The catch: the child must have documented earned income. Investment income and allowance don’t count.⁵

What You Need Before You Apply

Have these ready for both yourself and the child before you start the application:

Social Security numbers for both custodian and minor. The child’s SSN becomes the account’s tax ID, so investment earnings are reported under their name.¹
Full legal names and dates of birth, matching government records exactly. Nicknames and typos cause verification failures.
A U.S. residential street address, not a P.O. Box.
A phone number and email for statements, tax documents, and security alerts.
Government-issued photo ID. Some brokerages verify identity electronically; others ask you to upload a driver’s license or passport.

Filling Out the Application Online

Most major brokerages let you open a custodial account entirely online. On the new-account page, look for the custodial or UGMA/UTMA option, which is usually listed separately from standard individual accounts. During the application, you’ll designate yourself as custodian and the child as beneficiary and account owner.

You’ll be asked to pick which state’s UGMA or UTMA law governs the account, choose the account type, and enter the personal details above. Then you’ll review the custodial agreement, fee disclosures, and terms of service. Electronic signatures let you finish without printing or mailing anything.

After you submit, the brokerage runs a background check by cross-referencing Social Security numbers and addresses against federal databases. This typically takes one to three business days. If something doesn’t match — a recent address change, for example — the firm may ask you to upload a photo ID or Social Security card to clear it up. Once approved, you’ll receive an email with instructions for setting up login credentials.

Funding the Account

You have three common ways to move money in:

ACH transfer from a linked checking or savings account. Most common; funds usually become available in one to three business days.
Wire transfer. Often same-day, but your bank may charge $15–$30 for outgoing wires.
Check mailed to the brokerage’s processing center. Slowest option; expect a week or more before funds clear.

Every dollar you put into a UGMA or UTMA is an irrevocable gift to the child. Once the transfer settles, the money is theirs. For 2026, the federal annual gift tax exclusion is $19,000 per recipient.⁶ You can give up to that amount without filing a gift tax return. If both parents contribute, each can give $19,000, for a combined $38,000, with no gift tax paperwork. Amounts above the exclusion don’t necessarily trigger tax, but they do require reporting and reduce your lifetime estate tax exemption.⁷

Placing the First Trade

Once your transferred funds appear as available buying power in the account dashboard, you can buy securities. Enter the ticker symbol you want (for example, VTI for a total stock market index fund), select how many shares, and pick your order type. A market order fills immediately at the current price. A limit order lets you set the maximum price you’re willing to pay, which protects you in a volatile market but may not fill right away.

Securities transactions now settle on the next business day after the trade, known as T+1.⁸ After settlement, the shares sit in the custodial account under the child’s name. You can keep buying, selling, and rebalancing until they reach the age of majority.

How the Earnings Get Taxed

Custodial account earnings are reported under the child’s Social Security number, but they aren’t always taxed at the child’s rate. The IRS applies the “kiddie tax” to keep parents from parking large portfolios in their kids’ names.

For 2026, a child’s unearned income — dividends, interest, and capital gains — is taxed in three tiers:

The first $1,350 is covered by the child’s standard deduction and not taxed.
The next $1,350 (up to $2,700 total) is taxed at the child’s own rate, typically 10%.
Anything above $2,700 is taxed at the parent’s marginal rate, which can be significantly higher.⁹

The kiddie tax applies to children under 18, and in some cases to 18-year-olds whose earned income doesn’t cover more than half their own support, and to full-time students under 24 who meet the same support test.¹⁰ If unearned income crosses the $2,700 threshold, you file Form 8615 with the child’s return to calculate the tax at your rate.⁹

If the child’s only income is from interest and dividends (including capital gain distributions) and totals less than $13,500, you may skip filing a separate return. Form 8814 lets you elect to include the child’s investment income on your own return.¹¹ That simplifies the paperwork but can raise your adjusted gross income and affect other deductions and credits. For a small account throwing off a few hundred dollars in dividends, the convenience usually wins. For larger accounts, run the numbers both ways.

A custodial Roth IRA sidesteps the kiddie tax almost entirely. Contributions go in after-tax, qualified withdrawals come out tax-free, and there’s no annual unearned income hitting the child’s return while the money sits inside the Roth.

The Financial Aid Hit

This is the piece that quietly costs families money. On the FAFSA, a UGMA or UTMA is considered the student’s asset because the child is the legal owner. Student assets are assessed at 20% of their value when calculating expected family contribution, so a $50,000 custodial account can reduce aid eligibility by $10,000. Parent-owned assets like 529 plans are assessed at a maximum of about 5.64%, meaning the same balance in a 529 would reduce aid by roughly $2,820.

If college aid matters for your family, weigh this before funding a large custodial account. Some families split the goals: 529 for education, custodial account for everything else.

What You Can Spend the Money On

As custodian, you have a fiduciary duty to manage the account for the child’s benefit, not your own. You can make withdrawals, but only for expenses that directly benefit the child and go beyond the basic support you’re already legally required to provide. Enrichment activities, private school tuition, a laptop for school, and extracurricular programs are generally acceptable. Food, clothing, housing, routine medical care, and family vacations are not, because those fall under your existing obligations as a parent.

Courts have held that custodians who spend the money on themselves, or on household expenses that benefit the whole family rather than the child specifically, can face legal liability. If you wouldn’t be comfortable explaining a withdrawal to a judge as purely for the child’s benefit, don’t make it.

When the Child Takes Over

Custodial accounts have a built-in expiration date. When the child reaches the age of majority under their state’s UGMA or UTMA law (typically 18 or 21, though some states allow the account terms to extend as late as 25), the custodianship ends and the child gains full, unrestricted control over every dollar. No approval needed. No conditions attached.

This is the feature that gives many parents second thoughts. An 18-year-old who inherits a six-figure custodial account can legally spend it on anything. You can’t impose restrictions, claw the money back, or delay the transfer. The irrevocability that made the account easy to set up is the same feature that makes it impossible to course-correct later.

The transition itself is routine. On or shortly after the child’s birthday, the brokerage typically freezes the account until the former minor submits paperwork to re-register it in their own name. The child can keep the account at the same firm, transfer it elsewhere, or liquidate. If they don’t act promptly, most brokerages re-register the account in the child’s name after a waiting period, but access stays restricted until the paperwork is done.

Name a Successor Custodian

One detail that’s easy to overlook at account opening: what happens if you die or become incapacitated before the child reaches the age of majority? Without a designated successor custodian, a court may need to appoint one, and that process is slow, expensive, and may not produce the result you’d want. Most brokerages offer a successor custodian designation form at account opening or anytime afterward. It takes five minutes. Treat it like a beneficiary designation on a life insurance policy: fill it out immediately, and update it when your circumstances change.

1
Financial Crimes Enforcement Network. FAQs: Final CIP Rule
2
Cornell Law School. Uniform Gifts to Minors Act (UGMA)
3
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
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Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
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Internal Revenue Service. Retirement Topics – IRA Contribution Limits
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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Internal Revenue Service. What’s New – Estate and Gift Tax
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U.S. Securities and Exchange Commission. Shortening the Securities Transaction Settlement Cycle – A Small Entity Compliance Guide
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Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income
10
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
11
Internal Revenue Service. Instructions for Form 8814