How to Invest for Your Kids (2025): The Simple Guide to Custodial Accounts

As a parent, you’re constantly thinking about the future—not just your own, but your child’s. You want to give them every possible advantage in life, from a great education to a strong foundation for their own financial journey. In a world of complex financial products, it’s easy to feel overwhelmed, but I’m here to tell you that one of the most powerful gifts you can give your child is the gift of time, supercharged by the power of investing.

The good news is that in 2025, you don’t need to be a Wall Street expert or have a fortune saved up to get started. Thanks to modern, user-friendly investing apps, opening a special account for your child, known as a custodial account, is simpler and more accessible than ever. This guide will walk you through everything you need to know, step-by-step, to start building a nest egg that can change the trajectory of your child’s life.

Why Start Investing for Your Kids Now? The Power of Time

It’s a common question we hear: “Is it really worth investing small amounts for my child when they’re so young?” The answer is a resounding yes. When you’re investing for a child, your single greatest asset isn’t the amount of money you start with; it’s the amount of time you have. An 18-year timeline is an incredibly powerful engine for growth that most adult investors can only dream of.

Every dollar you invest today has nearly two decades to work for them before they even step into adulthood. This isn’t just about saving; it’s about actively growing their wealth in a way that a standard savings account simply can’t match. Let’s break down exactly why starting now is one of the most impactful financial decisions you can make for your family.

The Unbeatable Magic of Compound Interest

If there’s one financial concept that feels like magic, it’s compound interest. Albert Einstein is often quoted as having called it the “eighth wonder of the world,” and for good reason. It’s the process where your investment earnings start generating their own earnings. Over a long period, this creates a snowball effect that can turn small, consistent contributions into a substantial sum.

For a child, the timeline is perfect for this magic to unfold. To put it in perspective, consider this: Investing just $50 a month from the day your child is born could grow to over $25,000 by the time they turn 18, assuming a modest 7% average annual return. If you were to wait until they were 10 to start, you’d need to invest almost three times as much per month to reach the same goal. Time is truly the secret ingredient, and it’s a resource that’s on your side right now.

More Than Just Money: A Lifelong Lesson in Financial Literacy

Opening an investment account for your child is about more than just building wealth; it’s a powerful, hands-on teaching tool. As they grow older, you can involve them in the process. You can show them how their account is growing, explain what a stock or an ETF is, and talk about the companies they’re invested in (like Disney, Apple, or Nike). This transforms an abstract concept into something tangible and exciting.

By the time they take control of the account, they won’t just be receiving a sum of money—they’ll be receiving a foundational education in long-term thinking, patience, and the fundamentals of how markets work. This early exposure to investing demystifies the process, replacing potential intimidation with confidence. It’s a practical lesson in financial literacy that will serve them for the rest of their lives, long after the initial funds have been used.

Building a Flexible Nest Egg for Their Future

Many savings vehicles designed for children are restrictive. College savings plans, for example, come with tax benefits but also penalties if the money isn’t used for qualified educational expenses. What if your child decides to start a business, wants to put a down payment on a home, or receives a full scholarship? A custodial account offers unparalleled flexibility.

The money in this account legally belongs to your child and can be used for anything that benefits them, without penalty. It could be for their first car, a gap year to travel, seed money for a startup, or, yes, even college tuition. This flexibility is crucial because you can’t predict what their needs or dreams will be in 18 years. By choosing this route, you’re giving them the financial freedom to pursue their own unique path, making it a cornerstone of long-term financial planning for families.

What is a Custodial Account? The Nuts and Bolts Explained

Now that you understand the “why,” let’s dive into the “what.” The term “custodial account” might sound formal, but the concept is quite simple. It’s an investment account that an adult (the “custodian,” typically a parent or guardian) opens and manages on behalf of a minor (the “beneficiary”). It’s the primary tool for building wealth for minors who can’t legally open their own brokerage accounts.

Think of yourself as the financial guardian for this account. You make all the decisions—what to invest in, when to contribute, and how to manage the portfolio—until your child reaches a certain age. We’ll break down the key features, types, and rules so you can move forward with total confidence.

The Basics: The Child Owns It, The Adult Manages It

At its core, a custodial account has a simple structure. The moment you deposit money into it, that money (and any investments purchased with it) legally belongs to the child. It is their asset, registered under their Social Security Number. You, as the custodian, have a fiduciary duty to manage those assets responsibly for the child’s benefit.

This is a critical distinction from simply opening a separate account in your own name. Because the assets belong to the child, it ensures the funds are protected for their future. You control the account, making all the investment decisions, but you can’t withdraw the money for your own personal use (like paying your mortgage or buying yourself a car). This structure provides a clear and legally sound way to invest directly for your child’s future.

UGMA vs. UTMA: What’s the Difference in 2025?

When you go to open an account, you’ll see the acronyms UGMA and UTMA. It’s easy to get bogged down in jargon, but the difference is straightforward. These are simply the legal acts that established the framework for these accounts, and the names stand for the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA).

For most parents, especially those using a modern investing app, the distinction is minor. However, it’s good to know the basics:

• UGMA (Uniform Gifts to Minors Act): This is the older of the two. UGMA accounts are typically limited to holding purely financial assets. Think stocks, bonds, ETFs, mutual funds, and cash.
• UTMA (Uniform Transfers to Minors Act): This is a more modern, expanded version of UGMA adopted by most states. UTMA accounts can hold everything a UGMA can, plus real assets like real estate, fine art, and other property.

The Bottom Line: Since you’ll likely be using an app to invest in stocks and ETFs for your child, either account type will work perfectly fine. Most major brokerage apps today offer UTMA accounts, which cover all your bases. Don’t let these acronyms intimidate you; the function is nearly identical for the average investor.

Key Rules You MUST Know

Like any financial account, custodial accounts come with a set of rules. Understanding these up front is essential for avoiding any surprises down the road. We see these not as limitations, but as important protections that ensure the account is used as intended—for the benefit of your child. Knowing these rules is a key part of successful wealth building for minors.

Think of these as the simple “terms and conditions” for giving your child a massive financial head start. They are designed to protect the gift you’re giving and ensure it serves its purpose. Here are the three most important rules to be aware of.

• It’s an Irrevocable Gift: This is the most important rule. Once money is deposited into a custodial account, it cannot be taken back. It legally belongs to the child, and you cannot withdraw it for your own expenses. The funds can only be used for purchases or services that directly benefit the child (e.g., paying for summer camp, a computer for school, or tutoring).
• Control Transfers at the Age of Majority: When your child reaches the “age of majority” (also called the age of termination), you are legally required to turn control of the account over to them. This age varies by state but is typically 18 or 21. At that point, the money is theirs to use as they see fit, without any restrictions.
• Potential Tax Implications (The “Kiddie Tax”): Since the assets are in your child’s name, the investment gains are also theirs and are subject to taxes. For 2025, the first tier of unearned income is tax-free, and the next tier is taxed at the child’s low rate. However, once investment gains exceed a certain threshold (expected to be around $2,600 for 2025), they are taxed at the parents’ higher income tax rate. This is known as the “kiddie tax.” For most families starting with small, regular contributions, this won’t be an issue for many years.

How to Open a Custodial Account with an App in 5 Simple Steps

Gone are the days of needing a financial advisor and a stack of paperwork to get started. In 2025, you can open, fund, and manage a custodial account right from your smartphone in about 10 minutes. The process is designed to be intuitive, even for complete beginners. Think of it as setting up any other app on your phone, just with a much bigger long-term payoff.

We’ve broken down the entire process into five simple, actionable steps. Following this guide will take you from having an idea to having a fully functional investment account for your child, ready to start growing for their future.

Step 1: Choose the Right Investing App for Your Family

The first step is selecting the platform where you’ll build your child’s financial future. This is a crucial choice, as the right app can make the entire experience seamless and affordable. You’re looking for a partner in this journey, so you’ll want an app that is trustworthy, easy to navigate, and aligns with your goals. Don’t worry about finding the “perfect” one; many excellent options exist.

Your main considerations should be fees, ease of use, and the types of investments available. We’ll cover some of our top picks later in this guide, but the key is to choose a reputable company with a solid track record. Look for platforms that offer zero-commission trades and no monthly maintenance fees, ensuring that more of your money goes toward the investments themselves, not to the brokerage.

Step 2: Gather the Necessary Information

Before you sit down to open the account, it’s helpful to have a few key pieces of information handy. Financial institutions are required by law to collect this information to verify your identity and prevent fraud (this is part of a regulation called the “Know Your Customer” rule). Having it all ready will make the sign-up process take just a few minutes.

You’ll need the following for both the custodian (you) and the minor (your child):

• Your Social Security Number (SSN) or Taxpayer Identification Number (TIN)
• Your child’s Social Security Number (SSN)
• Your contact information (address, phone number) and your child’s date of birth

Step 3: Fund the Account

Once your account is approved (which is often instant), it’s time to add the initial funds. This is the moment it all becomes real. Modern apps make this incredibly easy, usually by linking directly to your checking account. You have several options for funding the account, and you can choose what works best for your family’s budget.

You can make a one-time transfer to get started, but we highly recommend setting up recurring, automatic deposits. Even $25 or $50 a month adds up significantly over time and builds a consistent investing habit. Many apps also have features that allow friends and family to gift money directly to the account, which is perfect for birthdays and holidays.

Step 4: Select Your Investments

This is the part that intimidates many new investors, but it doesn’t have to be complicated. With an 18+ year time horizon, the best strategy is often the simplest one. You don’t need to be a stock-picking genius. Instead, the goal is to buy a small piece of the entire market and let it grow over the long term.

Here’s our advice for a simple, effective strategy:

• Keep it Simple: We recommend starting with a low-cost, broadly diversified index fund or ETF. An S&P 500 ETF (which invests in the 500 largest U.S. companies) or a Total Stock Market ETF are fantastic, set-it-and-forget-it options.
• Fractional Shares: Don’t worry if you can’t afford a full share of a popular stock like Amazon or Apple. Most apps today offer fractional shares, allowing you to invest with as little as $1. This means you can build a diversified portfolio even with small amounts of money.

Step 5: Automate and Monitor

The final step is perhaps the most important for long-term success: put it on autopilot. The beauty of investing for a child is that you have time on your side, which means you don’t need to check the account every day or worry about short-term market fluctuations. In fact, it’s better if you don’t.

Set up those recurring deposits and let the system do the work for you. We recommend checking in on the account maybe once or twice a year to see the progress and ensure your investment choice still makes sense. This “set it and forget it” mindset prevents emotional decision-making and allows your long-term strategy to play out as intended.

Best Investing Apps for Custodial Accounts in 2025

Choosing the right platform is the first step on this journey, and the great news is that in 2025, parents have more high-quality, low-cost options than ever before. The competition among fintech companies and traditional brokerages has driven fees down and pushed user experience to the forefront. This means you can find a powerful, easy-to-use app that perfectly fits your needs.

When we evaluate these apps, we’re looking at them through the eyes of a busy parent like you. We prioritize simplicity, affordability, and features that make long-term investing easier. Let’s explore what you should be looking for and then review our top picks for the year.

What to Look For in a Custodial Account App

Before jumping into specific names, it’s important to have a mental checklist of what makes a great custodial account app. Not all platforms are created equal, and some are better suited for beginners while others offer more advanced tools. By focusing on a few key criteria, you can confidently choose the best fit for your family.

Here are the four pillars we believe are most important when making your decision:

• Low Fees: This is non-negotiable. Look for apps that offer $0 commission on stock and ETF trades and have no monthly maintenance or subscription fees for their basic custodial account. Fees are a drag on long-term returns, so minimizing them is key.
• Ease of Use: As a parent, your time is precious. The app should have a clean, intuitive interface that makes it easy to open an account, set up transfers, and check on your portfolio without a steep learning curve.
• Investment Options: While we recommend a simple strategy, the app should still offer a good selection of high-quality, low-cost ETFs, stocks, and mutual funds. This gives you the flexibility to adjust your strategy as your knowledge grows.
• Educational Resources: The best apps don’t just provide a platform to invest; they also offer articles, videos, and tools to help you and your child learn about money. This adds immense value beyond the account itself.

Our Top App Picks for 2025

After reviewing the landscape, we’ve identified several apps that excel in providing custodial accounts. Each has a slightly different strength, so you can choose the one that best aligns with your personal style and goals. These platforms have proven themselves to be reliable, user-friendly, and committed to helping families invest for the future.

Here are our top recommendations for opening a custodial account in 2025:

• For Overall Value & No Fees: Fidelity® Youth Account

  Fidelity is a trusted industry giant that has adapted beautifully to the modern investor. Their Youth Account is a standout because it has absolutely no account fees, no minimums to open, and no commission on trades. It offers a massive selection of investments and is designed to easily transition into an adult brokerage account when the time comes, making it a great long-term choice.

• For Hands-Off, Automated Investing: Acorns Early

  If you love the “set it and forget it” approach, Acorns Early is fantastic. It’s built around a subscription model ($5/month for a family plan) and automatically invests your spare change from everyday purchases through its “Round-Ups” feature. It offers pre-built, diversified portfolios, so you don’t have to pick any investments yourself, making it ideal for absolute beginners who want a completely hands-off experience.

• For All-in-One Financial Literacy: Greenlight + Invest

  Greenlight is more than just an investing app; it’s a complete financial literacy tool for families. It combines a debit card for kids with chore management, savings goals, and an integrated investing platform. While it comes with a monthly fee, it’s a great option for parents who want to actively teach their kids about earning, saving, and investing all within a single, controlled ecosystem.

• For Easy Gifting from Family: UNest / Stockpile

  These platforms have built their brands around making it incredibly simple for friends and family to contribute to a child’s account. They provide easy-to-share gifting links that grandparents, aunts, and uncles can use to send money for birthdays or holidays. If you anticipate a lot of family contributions, these apps streamline that process beautifully.

Custodial Accounts vs. Other Options: A Quick Comparison

As you explore the world of investing for your child, you’ll likely come across other types of accounts designed for minors. The two most common alternatives are 529 Plans and Roth IRAs for Kids. Each has its own unique purpose, benefits, and drawbacks. It’s not about finding the single “best” account, but rather understanding which tool is right for the job you have in mind.

We believe in empowering you with knowledge, so let’s quickly compare custodial accounts to these other popular options. This will help you confirm that a custodial account is the right choice for your goal of providing a flexible financial head start for your child.

Custodial Account vs. 529 Plan

This is the most common comparison, as both are popular ways to save for a child’s future. The primary difference comes down to flexibility versus tax advantages. A 529 Plan is specifically designed for education savings, offering fantastic tax benefits if the money is used for qualified expenses. Exploring various educational savings plans is a smart move if college funding is your top priority.

However, that focus on education comes with limitations. Here’s a simple breakdown:

• Custodial Account (UGMA/UTMA):
  • Pro: Maximum flexibility. The money can be used for anything that benefits the child—college, a car, a business, a house down payment—with no penalties.
  • Con: It is considered the child’s asset, which can have a larger negative impact on their eligibility for need-based college financial aid.
• 529 Plan:
  • Pro: Significant tax advantages. Your investment grows tax-deferred, and withdrawals are completely tax-free when used for qualified education expenses (like tuition, room, and board).
  • Con: If you withdraw money for non-educational purposes, the earnings portion is subject to both income tax and a 10% penalty.

Custodial Account vs. Roth IRA for Kids

A Roth IRA for Kids (also known as a Custodial Roth IRA) is a powerful retirement savings tool, but it comes with one very important prerequisite. Unlike a custodial account, which anyone can contribute to on behalf of a child, a Roth IRA requires the child to have *earned income*. This is money they’ve earned from a legitimate job, like babysitting, mowing lawns, or working a part-time retail job.

The rules are strict: you can only contribute up to the amount the child has earned for that year, capped at the annual IRA contribution limit. So, if your child is a toddler or doesn’t have a job, a Roth IRA isn’t an option. However, once your child starts working, opening a Custodial Roth IRA can be a fantastic way to introduce them to the power of saving for retirement with decades of tax-free growth ahead of them.

Your Next Step: Securing Their Future Today

We’ve covered a lot of ground, from the magic of compound interest to the nuts and bolts of opening an account on your phone. The key takeaway is this: investing for your child in 2025 is more accessible, affordable, and straightforward than ever before. The barriers that once existed—high fees, complex paperwork, and the need for large sums of money—have been torn down by technology.

You have the knowledge and the tools at your fingertips. The only thing left to do is take action. Remember, every single dollar you invest today is a seed planted for your child’s future. The best time to start was yesterday. The next best time is right now.

Choose one of the recommended apps, gather your information, and take 10 minutes to open their account today. Your future 18-year-old will thank you for it.

Frequently Asked Questions (FAQ)

It’s natural to have a few more questions as you get started. We’ve compiled some of the most common ones we receive from parents who are new to this process. Our goal is to provide clear, direct answers to help you move forward with confidence.

How much money do I need to start a custodial account?

This is one of the best parts about modern investing: there are typically no minimums. Most of the apps we recommend allow you to open an account with $0 and start investing with as little as $1 or $5. The key to long-term success is not the size of your initial deposit, but the consistency of your contributions over time. Start with an amount that feels comfortable for your budget and set up automatic transfers.

Can grandparents or other family members contribute to a custodial account?

Absolutely! This is a wonderful way for the whole family to invest in a child’s future. Most modern apps are designed with this in mind and provide a personalized gifting link for the child’s account. You can share this link with grandparents, aunts, uncles, and friends, and they can easily contribute money for birthdays, holidays, or any other occasion. The funds are deposited directly into the child’s account to be invested.

What happens to the money if I, the custodian, pass away?

This is an important and practical question. When you set up a custodial account, the application process will require you to name a “successor custodian.” This is the person you designate to take over management of the account in the event of your death or incapacitation. This ensures a seamless transition and that the account continues to be managed responsibly for the child’s benefit until they reach the age of majority.

Can I withdraw the money from a custodial account for an emergency?

No, you cannot withdraw money from the custodial account for your own personal expenses or emergencies. The money is an irrevocable gift that legally belongs to the child. Withdrawals can only be made for expenses that directly benefit the minor, such as paying for school tuition, summer camp, a computer, or even medical bills for the child. Using the funds for parental expenses is illegal and could have serious legal and tax consequences.

What are the best investments for a child’s long-term account?

While we always recommend consulting with a financial professional for personalized advice, a general principle for long-term investing (18+ years) is to favor growth and diversification. For most people, a simple, low-cost, broadly diversified index fund or ETF is an excellent choice. A fund that tracks the entire U.S. stock market (like VTI) or the S&P 500 (like VOO or SPY) provides instant diversification across hundreds or thousands of companies, capturing the overall growth of the market over time.