Custodial Account Rules: Taxes, Withdrawals, and What Custodians Need to Know

A custodial account is a flexible way to invest for your child's future, and comes with a specific set of rules that custodians are responsible for following. The rules cover who can contribute, how much, how the account is taxed, what you can and can't spend the money on, and what happens when your child reaches the age of transfer. Getting them right keeps you on the right side of the IRS and makes sure the money you're investing actually benefits your child the way you intend.

This guide walks through the rules that apply day-to-day as a custodian. If you're not yet sure whether a custodial account is the right choice for your family, start with our overview of investing for kids or our deep-dive on what is a custodial account.

Who can contribute to a custodial account?

Anyone can. Parents, grandparents, aunts and uncles, godparents, and family friends can all contribute to a child's custodial account. Only the custodian (the adult who opened the account) makes investment decisions, but anyone can add to the balance. This is one reason why custodial accounts are a popular way for extended family to give financial gifts for birthdays, holidays, and milestones.

How much can you contribute to a custodial account?

There's no contribution limit on a custodial account. Unlike retirement accounts, 529 plans, or health savings accounts, you can add as much as you'd like in a given year or over the life of the account.

While there’s no contribution limit, gift tax rules do apply. Contributions to a custodial account are considered gifts to the child for federal tax purposes. For 2026, a single person can give up to $19,000 per child without filing a gift tax return (IRS Form 709). Married couples who elect to split gifts can give up to $38,000 per recipient. Contributions above those amounts generally require filing Form 709 with the IRS. Filing a return isn't the same as owing tax. Most people who file Form 709 don't end up owing gift tax, since contributions draw down the lifetime gift and estate tax exemption (currently $15 million per individual in 2026) rather than triggering an immediate tax bill.

Who pays taxes on a custodial account?

The child is the legal owner of the account, so any investment income earned from inside the account is the child's income for tax purposes. In practice, most kids don't file their own tax returns, so the custodian is usually needed to handle the paperwork. Depending on how much investment income the account has earned and how the family chooses to report it, the custodian can either file a separate return for the child or report the child's income on their own return.

The amount of tax owed depends on the kiddie tax rules, which we cover next.

How are custodial accounts taxed?

Because the account legally belongs to the child, any unearned income it generates (interest, dividends, and realized capital gains) is the child's income. The IRS uses the kiddie tax rules to keep parents from shifting large amounts of investment income to their children just to take advantage of a lower bracket. For 2026, the rules work in three brackets:

• First $1,350: tax-free
• Next $1,350 (up to $2,700 total): taxed at the child's own rate, typically 10%
• Above $2,700: taxed at the parent's marginal rate
   

One practical detail worth knowing: tax only applies to realized gains. Unrealized gains are the increase in value of investments you're still holding and are not taxed each year. For a buy-and-hold strategy, the annual taxable income in a custodial account is usually just dividends and interest, which for most families stays below the first $1,350 threshold for years. It takes a sizable balance to generate enough dividend income to even reach the first bracket, let alone the third. You can see a full worked dollar example of how the kiddie tax works in our guide on what is a UGMA/UTMA custodial account.

After the child reaches the age of transfer, the kiddie tax no longer applies to most young adults and income is taxed at the child's own rate from that point forward. There's an exception for full-time students under age 24 who are still claimed as dependents. In that case, kiddie tax rules can still apply.

What tax forms do parents file for a custodial account?

Two IRS forms come up most often when parents report custodial account income: Form 8814 and Form 8615. They're alternatives for the same general situation (reporting a child's unearned income), but they work differently.

Form 8814: Parents' Election to Report Child's Interest and Dividends

Form 8814 is available to parents who plan to report their child's unearned income on their own tax return instead of filing a separate return for the child. It applies only when the child's income consists of interest, dividends, and capital gain distributions, and the child's total income falls below a specific threshold (it can vary year to year but for 2026, $13,500). The child must also meet certain age and dependency conditions.

The trade-off: Electing Form 8814 is simpler, but the child's income is added to the parent's return and may push some of the parent's other income into a higher bracket or affect other tax calculations. For families with small amounts of custodial account income, it's often the easier choice. For larger amounts, it isn't always the best one. 

Form 8615: Tax for Certain Children Who Have Unearned Income

Form 8615 is filed with a child's own tax return to calculate the kiddie tax on unearned income above the $2,700 threshold. If the child files their own return, or if the family's situation makes Form 8814 unavailable or undesirable, Form 8615 is generally the path used.

Which form applies to your family?

That depends on the specific numbers, the child's other income, and how the family wants to handle tax filing overall. The IRS.gov instructions for Form 8814 and Form 8615 lay out the requirements for each. For most families, the practical move is to talk with a qualified tax professional, particularly the first year the custodial account generates enough income to trigger kiddie tax (above $1,350), since the choice between the two forms can have real tax consequences.

During tax season, you'll typically receive a Form 1099-DIV or 1099-INT from the brokerage that shows the dividends, interest, and any capital gain distributions generated in the account. That's the starting document for whichever reporting path you take.

Can I withdraw money from my child's custodial account?

Yes, but with an important limit. Every contribution to a custodial account is an irrevocable gift to the child. That means you can't withdraw money from the account for your own use, your spouse's use, or any purpose that isn't for the direct benefit of the child. Custodians who break this rule can be subject to tax consequences and, in extreme cases, legal liability.

Withdrawals that are used for the child's benefit are generally allowed. What qualifies as “for the child's benefit” isn't a sharp legal line, but the general standard is whether the expense is primarily and directly helpful to the child. Courts and the IRS have taken a practical view over the years.

One tax consideration: Withdrawals themselves aren't taxed, but selling investments to generate the cash for a withdrawal can trigger capital gains tax. For buy-and-hold custodial accounts with unrealized gains, a withdrawal can mean a tax bill that wouldn't exist if you left the money invested.

What can custodial account funds be used for?

Before the child reaches the age of transfer, funds can be spent on anything that directly benefits the child. That's broader than many parents assume. Examples that generally qualify:

• Private school or tutoring tuition
• Summer camps and enrichment programs
• Music lessons, sports fees, or extracurricular activities
• Medical and dental expenses not covered by insurance
• Electronics, clothing, or other necessities specifically for the child
• A car the child uses
• College tuition, books, and living expenses
   

What generally doesn't qualify: Your own household expenses, groceries for the whole family, a family vacation where the child is just one of several beneficiaries, or anything the parent is already legally required to provide (basic food, shelter, and medical care that parents owe to their children by law). The gray area in the middle (family expenses that partially benefit the child) is where most custodians run into trouble, and is worth a conversation with a tax professional before making a large withdrawal that isn't clearly for the child alone.

Once the child reaches the age of transfer, the funds and account altogether are handed over to them, and the money is theirs to use however they choose.

What are the custodian's responsibilities?

The custodian is a fiduciary, which means you have a legal duty to manage the account in the child's best interest. In practice, this comes down to three things:

• Invest prudently. Choose investments appropriate for a child's time horizon and the family's goals. A diversified portfolio is generally considered appropriate; highly speculative investments are not.
• Keep funds separate. Don't mix funds in a custodial account with your own. The account should be titled in the child's name with you as custodian, and you shouldn't move money back and forth between the custodial account and your personal accounts.
• Use the money only for the child. Withdrawals must be for the child's benefit. Documentation of what funds were spent on can help if the decision is ever questioned.
   

Custodians also handle the administrative work of opening the account, making investment decisions, filing the appropriate tax forms (or working with a tax professional who does), and eventually transferring control to the child.

What happens when my child reaches the age of transfer?

When the child reaches the age of transfer in their state (typically 18 or 21, with some states allowing a custodian to extend the age up to 25 when the account is opened), full legal control of the account transfers to them. They become the account owner with no restrictions on how they use the money. You, as the former custodian, no longer have legal control.

For a complete state-by-state breakdown of the age of transfer, see our guide to UGMA/UTMA custodial accounts. The months leading up to the transfer are a natural time to talk with your child about the account: what's in it, how it's been invested, and what their options are once control transfers. An open conversation before transfer day tends to lead to better outcomes than a surprise handoff.

How do custodial accounts affect financial aid?

For FAFSA, custodial accounts count as the student's asset. Student assets are assessed at up to 20% in the Student Aid Index calculation, while parent-owned assets are assessed at a maximum of 5.64%. That difference can meaningfully reduce need-based financial aid eligibility for families expecting to qualify. For the full breakdown and strategies families sometimes use to reduce the aid impact, see our guide to UGMA/UTMA custodial accounts.

Is a custodial account or 529 plan better?

The short answer: a 529 is usually stronger if the money is specifically for education, while a custodial account is more flexible for any other use. For the full comparison (taxes, control, FAFSA treatment, and the SECURE 2.0 Act rollover provision), see our dedicated guide to custodial account vs. 529 plan.

Putting the rules into practice

Custodial account rules aren't complicated once you know them, but they do require attention each year at tax time and discipline with withdrawals. If you're looking for a straightforward way to open and manage one, Acorns Early Invest is a UTMA custodial investment account available on the Acorns Gold plan. Your kids can each have their own expert-built, diversified portfolio, and you can set up automatic Recurring Investments to invest in their future. Family and friends can contribute too. Pairing it with the Acorns Early kids' debit card gives your child practical experience with money while you handle the long-term investing.

Investing involves risk, including loss of principal. Past performance does not guarantee future results. No level of diversification or asset allocation can ensure profits or guarantee against losses.

Open a custodial account with Acorns Early Invest.

Frequently asked questions

What are the 2026 tax rules for a custodial account?

For 2026, the kiddie tax rules apply to investment income in a custodial account. The first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child's rate (typically 10%), and anything above $2,700 is taxed at the parent's marginal rate. There are no contribution limits on the account itself, but contributions above $19,000 per child per year per donor ($38,000 for married couples) may trigger gift tax reporting (IRS Form 709). Only realized gains are taxed each year, so for buy-and-hold accounts, annual taxable income is usually just dividends and interest.

Are withdrawals from a custodial account taxable?

The act of withdrawing cash from the account isn't itself a taxable event. But if you need to sell investments to generate the cash, the sale may realize capital gains, which are subject to the kiddie tax rules described above. Dividends and interest that accumulate in the account are taxed annually whether or not you withdraw them. For most families, the practical tax consequences of a withdrawal come from the investment sales required to fund it, not the withdrawal itself.

Can I close a custodial account before my child reaches the age of transfer?

You can liquidate the investments and move the cash to a different custodial account at another brokerage, but you can't close the account and take the money for yourself. The assets legally belong to the child and can only be used for the child's benefit. If the child passes away before reaching the age of transfer, the account assets pass to their estate according to state law.

Does my child need to file their own tax return?

Not always. If the child's unearned income stays below $1,350 for 2026 and they have no earned income, they generally don't need to file. If the amount exceeds $2,700, kiddie tax applies and the child typically needs a return (filed with Form 8615), unless the parent elects to report the income on their own return using Form 8814. The thresholds and rules change periodically, and the decision about how to file involves several moving parts. For most families, it's worth a conversation with a tax professional in any year the custodial account generates meaningful income.

Can custodial account money be used for college tuition?

Yes. College tuition, books, room and board, and other education-related expenses for the child are among the most common and clearly qualifying uses of custodial account funds. Because custodial accounts aren't restricted to education (unlike 529 plans), they can also be used for any other purpose that benefits the child directly. Just note that if your child plans to apply for need-based financial aid, custodial account assets are counted as the student's asset on the FAFSA and are assessed at a higher rate than parent-owned assets.

What's the difference between UGMA and UTMA custodial account rules?

Both account types follow the same core rules around contributions, taxes, withdrawals, and transfer of control. The main practical differences are which assets each can hold (UGMA is limited to financial assets like stocks and bonds; UTMA adds real estate, art, and other property) and the age of transfer (which varies more widely across states for UTMA accounts). For a detailed comparison, see our guide to UGMA/UTMA custodial accounts.