How to Use Custodial Accounts for Education: A Parent’s Guide

Custodial accounts (UGMA/UTMA in the U.S. and equivalents elsewhere) are a straightforward, flexible way to give money or investments to a child while keeping an adult in charge until the child reaches legal age. They’re not perfect for every family, but when used thoughtfully, they can boost education savings, teach financial responsibility, and simplify gifting from relatives. 

This guide explains how to use custodial accounts for education work, their pros and cons for education planning, practical setup and funding tips, tax and aid implications, and how custodial accounts fit alongside other options like 529s, high-yield savings, and modern tools such as Beem’s Smart Wallet and Everdraft™.

What is a custodial account, and how does it work

A custodial account is an account opened and managed by an adult (the custodian) for the benefit of a minor (the beneficiary). The custodian controls investment and spending decisions until the child reaches the age set by state law. At that point, control legally transfers to the child.

Key features, in plain terms

• Ownership. Legall,y the funds belong to the child, but the custodian manages them until the age of transfer.
  
• Flexibility. Money can be used for any purpose that benefits the child, including education, but there are no restrictions requiring funds be used for schooling.
  
• Irrevocable gifts. Contributions are permanent gifts to the child. You can’t take them back.
  
• Age of termination. When the beneficiary reaches the state-specified age (often 18–21), they gain full control. Plan accordingly.
  

Why families choose custodial accounts for education

Custodial accounts are popular because they’re simple, flexible, and family-friendly. Here are the core reasons parents and relatives use them for educational goals.

Advantages at a glance

• Simplicity. Easy to open at most brokerages or banks, with straightforward rules.
  
• Gifting ease. Grandparents, relatives, and friends can easily contribute. Many custodial accounts have gifting links or simple transfer instructions.
  
• Investment options. You can hold cash, ETFs, stocks, or bonds, depending on the custodian platform. That allows growth potential for long-term goals.
  
• Teaching tool. Kids can watch their balance grow and learn investing basics before they take control.
  

Real-world fit

Custodial accounts are helpful when you want a flexible pool of money for a child’s education or life needs, and you’re comfortable that the child will eventually control the funds. They’re often used alongside dedicated education vehicles to cover non-qualified expenses or to allow family members a simple way to help.

Custodial accounts vs. other education savings vehicles

Choosing the right account depends on timeline, tax goals, control preferences, and financial-aid considerations.

Custodial account vs. 529 plan

• Flexibility. Custodial: funds can be used for anything that benefits the child. 529: tax-free withdrawals when used for qualified education expenses.
  
• Control. Custodial: child becomes owner at legal age. 529: account owner retains control even after beneficiary starts college. Learn about Is a Non-Custodial Parent Responsible for Car Insurance?
  
• Aid impact. Custodial funds typically count more heavily in financial-aid calculations than parent-owned 529s, because they’re considered the student’s asset once filed. Use a strategy around timing to reduce aid impact.
  Choose 529 for tax-efficient college funding. Choose custodial when you value flexibility and family gifting or want to teach financial responsibility.
  

Custodial account vs. Roth IRA (for parents)

• Roths are retirement accounts first. Withdrawals of contributions are penalty-free and sometimes used for education, but that erodes retirement savings.
  
• Custodial accounts are education-and life-flexible for the child, but they don’t preserve tax-free education withdrawals. Use Roths sparingly for education; prioritize them for retirement.
  

Tax basics and financial-aid implications

Taxes and aid are the two areas where custodial accounts surprise families most. Know the rules before you commit.

Tax treatment

• Investment income may be taxed at the child’s rate, but there are “kiddie-tax” rules. Modest unearned income may be taxed at the child’s lower brackets, while larger amounts could be taxed at parents’ rates.
  
• Custodial accounts don’t offer the education tax benefits that 529 plans do. Earnings withdrawn for education are taxable to the beneficiary as income (no penalty, because funds belong to the child).
  

Financial-aid considerations

• FAFSA and other aid forms generally count custodial assets as student assets, which reduces aid eligibility more than parental assets. Even modest custodial balances can have an outsized effect because a percentage of student assets is assumed to be  available to pay costs.
  
• Timing matters. Using custodial funds before filing the FAFSA or timing distributions carefully can blunt aid impact. Consult a financial aid professional for complex scenarios.
  

Practical setup: How to open and fund a custodial account

A short, practical checklist for immediate action.

Steps to open one

1. Choose a provider. Banks and brokers both offer custodial accounts; pick one with low fees and the investment options you want.
   
2. Complete application. You’ll need custodian and beneficiary details, and sometimes Social Security numbers.
   
3. Fund the account. Start with an initial contribution, and set up recurring transfers if you plan monthly funding.
   
4. Add family contributors. Share transfer instructions or gifting links so relatives can contribute easily.
   

Funding tactics that work

• Automate small monthly transfers from checking to make saving predictable.
  
• Route windfalls (bonuses, tax refunds, wedding gifts) into the account with a simple split rule.
  
• Ask relatives for contributions to the custodial account instead of toys, with a short explanation of how their gift helps the child’s future.
  

Investing within a custodial account: Risk, horizon, and strategy

Match the portfolio to the time until the beneficiary gains control and the family’s risk tolerance.

Simple allocation rules

• Long horizon (10+ years): equity-heavy mix to capture growth. Consider low-cost index ETFs.
  
• Medium horizon (3–10 years): balanced allocation. Shift gradually toward bonds and cash as the child nears ownership age.
  
• Short horizon (<3 years): conservative cash-like holdings to preserve principal. Consider using Beem to spend, save, plan and protect your hard-earned money like an pro with effective financial insights and suggestions.
  

Rebalancing & management

• Rebalance annually to maintain your intended risk level.
  
• Tax-aware moves. Try to harvest tax-efficient gains, especially in higher-balance accounts that could trigger kiddie-tax thresholds.
  

How custodial accounts fit into an education funding plan

Custodial accounts are rarely the sole solution. Use them as part of a blended strategy.

Complementary uses

• Fill non-qualified cost gaps. Use custodial funds for travel, laptops, or housing that aren’t covered tax-free by 529s.
  
• Bridge gifts and scholarships. If scholarships free up 529 funds, custodial money can cover other real student needs.
  
• Teach stewardship. Use a portion of the custodial account to engage and educate the child on spending and saving decisions.
  

Rules of engagement: Family governance and behavioral safeguards

Because the child becomes the legal owner, set clear family rules to preserve the account’s intended use.

Governance ideas

• Written intention. Create a short, signed family statement describing how funds should be used (education, career start, housing). While not legally binding, it sets expectations.
  
• Scheduled education conversations. Use quarterly check-ins to show account growth and discuss goals.
  
• Staged access. If you want to encourage maturity, plan to educate the teen before they gain legal control rather than surprise them with full access.
  

When not to use a custodial account

Custodial accounts are not ideal if:

• You want to protect the funds from the child’s discretion at adulthood.
  
• You plan to maximize need-based financial aid income.
  
• You need explicit tax-advantaged education-only growth. In these cases, consider a 529 plan or HYSA instead.
  

Converting a custodial account when plans change

Plans shift and children’s needs evolve. Options include:

Common transitions

• Transfer to beneficiary. Once the child reaches legal age, funds transfer automatically. Prepare them with education on financial responsibility.
  
• Use funds before transfer. Spend some custodial money on education expenses while the parent retains control to avoid negative aid timing effects.
  
• Gift redirection. If the child gets a full scholarship and the account is no longer needed for college, consider using funds for graduate school, apprenticeships, or changing the account purpose with the child’s input.
  

Using custodial accounts with modern tools and Beem

Custodial accounts are straightforward to manage, and modern money tools make oversight easier without turning saving into a chore.

Beem Smart Wallet

Use Beem’s AI-powered Smart Wallet to monitor account inflows and outflows, plan recurring contributions, and forecast whether the custodial balance is pacing toward your education targets. Smart Wallet can help you balance day-to-day spending with long-term custodian contributions, making saving automatic and visible.

Beem Everdraft™ and responsible short-term support

If a timing gap threatens an education deadline and you have exhausted low-cost options, Beem’s Everdraft™ provides up to $1,000 of instant, no-interest cash for eligible users. Treat any Everdraft™ usage as a tactical safety net. Automate repayment immediately and rebuild buffers so the advance remains a one-time bridge, not a recurring solution.

Marketplace uses

Beem’s marketplace can help you compare HYSA rates for parking short-term custodial deposits, or shop for personal loan options if a structured loan becomes necessary. Use it to find competitive yields or borrowing rates instead of making ad-hoc decisions.

Practical case studies: Three common family scenarios

Short, applied examples to show how custodial accounts can work in practice.

Case 1: Grandparents want to contribute yearly

Grandparents set up a custodial account and contribute $1,000 each birthday and holiday. Over 14 years, the account has grown with a simple index-based investment. The child gains ownership at 18, but has been taught investing basics since age 12 and is prepared to use funds for a college laptop and early tuition deposits.

Case 2: Parents balance 529 and custodial

Parents prioritize a 529 for tuition tax savings, while using a custodial account for discretionary education spending (study abroad, travel, equipment). This preserves 529 benefits while giving family flexibility for non-qualified needs.

Case 3: Late starter with a short horizon

A parent starts a custodial account when the child is 15 and funds it with windfalls and recurring transfers. Given the short horizon, investments are conservative and the account is intended for a first-year college deposit or emergency buffer rather than long-term growth.

Setting expectations: What kids should know before they inherit control

When the legal handover happens, children should be ready.

Teach before transfer

• Budgeting basics. Show how to build a simple monthly plan to avoid quick depletion.
  
• Tax basics. Explain how investment earnings may be taxed and why that matters.
  
• Long-view thinking. Encourage them to reserve a meaningful share for education-related goals, even if the account is legally theirs.
  

Common mistakes and how to avoid them

• Mistake: using custodial funds impulsively after ownership transfer. Fix: staged education on budgeting and a written family plan.
  
• Mistake: ignoring tax implications of large custodial balances. Fix: consult a tax professional and consider gifting strategies.
  
• Mistake: sole reliance on custodial accounts for college funding. Fix: diversify with 529s, HYSAs, scholarships, and steady savings.
  

Actionable checklist: First 10 steps to set up a thoughtful custodial plan

1. Decide the role: education supplement, general gift, or teaching tool.
   
2. Choose a provider with low fees and suitable investments.
   
3. Open the account with the correct custodian/beneficiary info.
   
4. Set up automated transfers aligned with paydays.
   
5. Create a simple contribution guide for relatives.
   
6. Choose an investment allocation based on time horizon.
   
7. Implement annual rebalancing or set up auto-rebalance.
   
8. Keep a written family intention for the funds.
   
9. Use a Smart Wallet to monitor progress and forecast needs.
   
10. Prepare an age-appropriate education session for the teen before ownership transfer.

Custodial accounts are a powerful, human-friendly tool for education and life planning when used deliberately. They offer easy gifting, investment flexibility, and teachable moments, but require clear family rules, tax awareness, and an integrated funding strategy. Use custodial accounts alongside tax-advantaged plans, high-yield savings, scholarships, and modern tools like the Beem app’s Smart Wallet and Everdraft™ to build a robust, resilient education plan that balances growth, flexibility, and real-world preparedness.

FAQs About How to Use Custodial Accounts for Education