How Teens Can Use a Custodial Account to Start Building Wealth

You cannot open a brokerage account on your own until you turn 18. But you can start investing years before that through a custodial account that a parent or guardian manages on your behalf.

Many families already know about custodial Roth IRAs for teens with earned income. Fewer know about the broader category of custodial accounts that let any teenager, even one without a job, get money into the market early.

This guide covers both types, how they differ, what the 2026 tax rules look like, and why the math of starting at 14 versus 18 is more significant than most people realize.

What Is a Custodial Account?

A custodial account is an investment account opened by an adult (the custodian) for a minor (the beneficiary). The custodian manages the account, making investment decisions, funding contributions, and handling paperwork, until the minor reaches adulthood, at which point the account transfers fully to them.

There are three main types:

For wealth-building purposes, the two most relevant accounts are the UGMA/UTMA and the custodial Roth IRA. The 529 is education-specific and covered in detail in the college funding posts.

UGMA and UTMA Accounts: Investing Without a Job

A UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) account is a standard taxable brokerage account held in a minor's name, managed by a custodian.

The key advantage: No earned income required. A parent, grandparent, or relative can contribute money as a gift. The teen does not need a job.

What you can invest in: Stocks, ETFs, mutual funds, bonds. Essentially anything available in a standard brokerage account.

When the teen gains full control: Age 18 in most states (21 in some). At that point, the account is entirely the teen's and the custodian has no further authority. This is an important consideration: the money becomes unconditionally theirs at adulthood, regardless of how they choose to use it.

The Tax Rules (The Kiddie Tax)

Investment income in a custodial account, including dividends, capital gains, and interest, is subject to what the IRS calls the kiddie tax rules. Here is how it works for dependents under 19 (or under 24 if full-time students), using 2026 thresholds:

For most teenagers with modest account balances, this is a non-issue. A $5,000 UGMA account earning 8% annually generates about $400 in gains per year, well below the $2,800 threshold. As the account grows substantially, a CPA can help plan around the kiddie tax.

One important gift tax note: Contributions to a UGMA/UTMA are irrevocable gifts. Once money is in the account, it belongs to the minor. Contributions above $19,000 per year (the 2026 annual gift tax exclusion) from a single donor may require filing a gift tax return, though not necessarily paying gift tax. Most family contributions stay well within this limit.

Financial Aid Impact

Custodial accounts affect financial aid differently than parent-owned accounts. Under the FAFSA, assets in a student's name (including UGMA/UTMA accounts) reduce aid eligibility at a rate of 20% of the asset value, while parent assets are assessed at a maximum rate of 5.64%. A $50,000 UGMA account could reduce financial aid eligibility by $10,000, while the same amount in a parent-owned brokerage account would reduce it by roughly $2,820.

This is a meaningful consideration for families expecting to qualify for need-based aid. If financial aid is a priority, consider directing gifts to a 529 plan (treated as a parent asset on the FAFSA if parent-owned) or a custodial Roth IRA (retirement accounts are not counted as assets on the FAFSA).

Custodial Roth IRA: The Most Powerful Option for Working Teens

If the teenager has any earned income, whether wages from a job or self-employment income from tutoring or lawn care, the custodial Roth IRA is in a different category entirely from a UGMA.

Why it is so powerful:

• Tax-free growth for potentially 50 or more years
• No taxes on any of the gains, ever (for qualified withdrawals)
• No kiddie tax exposure (investment gains inside a Roth IRA are not subject to the kiddie tax)
• Contribution limit: up to $7,500 per year in 2026, but capped at the teen's actual earned income

Compare the long-term outcome of the same $1,000 in a UGMA versus a Roth IRA, both invested in a total market index fund at an assumed 8% annual return:

Same investment, same return, dramatically different after-tax outcome. The Roth IRA wins not because it grows faster but because you keep more of what it grows.

For a working teenager contributing the full $7,500 per year from ages 16 to 18 (3 years, $22,500 total), projected to retirement at 65 assuming 8% average annual return: approximately $980,000, entirely tax-free.

That is the case for opening a custodial Roth IRA the moment a teenager has their first earned income. Use the Roth IRA calculator to model different contribution scenarios.

The UTMA-to-Roth Conversion Strategy

One advanced strategy combines both account types: fund a UTMA account with gift money, then when the teen has earned income, sell UTMA assets and contribute the proceeds to a custodial Roth IRA. This effectively converts gift money into tax-advantaged retirement savings.

The mechanics: the teen must have earned income equal to or greater than the Roth contribution. If a 16-year-old earns $3,000 from a summer job, the custodian can sell $3,000 worth of investments from the UTMA and move the proceeds into the Roth IRA. The UTMA sale may trigger capital gains, but at the teen's tax rate (often 0% for long-term gains within the kiddie tax thresholds).

This strategy requires careful record-keeping and should be discussed with a tax professional, but it can be an effective way to maximize tax-advantaged savings for teens who work.

Which Account Should You Open?

For most teenagers, the answer is: open the Roth IRA first (if there is earned income), then a UGMA if there are additional funds to invest.

How to Open Each Account

Custodial Roth IRA

The three best brokerages for custodial Roth IRAs:

• Fidelity: best overall for beginners, fractional shares, no minimums, excellent app
• Charles Schwab: strong research tools, no minimums, great for long-term investors
• Vanguard: excellent for index fund purists; slightly less beginner-friendly interface

Steps:

1. Go to the brokerage's website and search "custodial Roth IRA"
2. The parent completes the application as the custodian; the teen's SSN is required
3. Link a bank account to fund contributions
4. Choose one broad index fund (FXAIX at Fidelity, SWTSX at Schwab, or VTSAX at Vanguard)
5. Set up automatic monthly contributions if possible

UGMA/UTMA

All three brokerages above also offer UGMA/UTMA accounts. The process is similar: the parent opens as custodian, the minor is the account owner. Any adult can then contribute to the account as a gift (grandparents, relatives, etc.).

What to Actually Invest In

The investment choice is simpler than most people think. At this stage, you do not need a sophisticated portfolio.

One of these is enough to start:

A 16-year-old has a 40-plus year time horizon before retirement. Over that timeframe, a broad US stock market index fund is one of the best-documented wealth-building vehicles in financial history. You do not need to diversify into bonds, international funds, or alternative assets at this stage. One fund, consistent contributions, leave it alone.

Real-World Examples

Example: Amara, 15, no job, grandparent wants to give investment gift

Situation: Amara's grandmother wanted to give her $2,000 as a birthday gift "for her future." Instead of cash, they opened a UGMA account at Fidelity together.

What they invested in: All $2,000 went into FXAIX. Grandmother plans to contribute $500 per year going forward.

Projected result: If contributions continue for 5 years ($4,500 total) and the account is left alone until Amara is 65 (50 years from now at age 15), the approximate projected value is $220,000. A $4,500 gift transformed into generational wealth.

Example: DeShawn, 16, has a summer job

Situation: DeShawn earned $2,800 last summer doing landscaping. His dad opened a custodial Roth IRA at Charles Schwab.

What he did: They contributed $2,000 to the Roth IRA (under his earned income limit of $2,800). Invested in SWTSX (Schwab's total market fund).

Projected result: That $2,000 at age 16, left untouched until 65 (49 years), projects to approximately $86,000, entirely tax-free. DeShawn plans to contribute each summer he works.

Example: The Rodriguez family

Situation: The parents opened both a custodial Roth IRA and a UGMA for their daughter Nina at 14. The Roth received her babysitting income ($1,200 per year); the UGMA received birthday gift money from relatives.

What they invested in: Both accounts hold VTI.

Result: By the time Nina turned 18, the Roth IRA had $4,800 in contributions and approximately $5,900 in value. The UGMA had $4,600 in value. She entered college with over $10,000 in invested assets and a functioning understanding of how markets work.

The One Thing That Matters Most

Every year you wait to open one of these accounts is a year of compound growth lost. The math is not forgiving: an account opened at 14 has 4 more years of compounding than one opened at 18. On a long time horizon, those 4 years can account for 30 to 40% of the final balance.

The conversation to have with a parent this week: "Can we open a custodial account for me? I want to start investing the money I earn." That conversation, and the account that follows, can be worth more than almost any other financial decision made in your teens.

For details on the Roth IRA specifically, including the full rules on teen eligibility and how to choose investments, see What Is a Roth IRA? Why Your Parents Should Open One for You Now. For a broader introduction to investing fundamentals, the first investment portfolio guide is a natural next read.

This post is for informational purposes only and does not constitute financial or tax advice. Kiddie tax thresholds, gift tax exclusions, and contribution limits are based on 2026 IRS figures and change annually. Consult a tax professional for guidance specific to your situation. Investment projections are illustrative and based on assumed 8% annual returns. Actual returns vary and are not guaranteed.