When children receive money, through earnings, gifts, or inheritance, custodial accounts offer a way for a custodian to manage the money for the child.
What are custodial accounts?
Custodial accounts, Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), offer a convenient and tax-efficient way to manage and possibly grow a child’s money. These accounts allow parents or guardians to invest on behalf of their children, with the assets irrevocably belonging to the child.
Benefits of custodial accounts
As children grow up, the money in a custodial account can be used for their benefit, such as paying for educational expenses, extracurricular activities, a house down payment, or establishing a foundation for their future. Once they reach adulthood, typically between 18 and 25 years old depending on the state, the custodian must transfer any unused assets to the beneficiary.
It's important to plan for the transfer at the appropriate age. At some financial institutions, like Fidelity, you won’t be able to add any new money or buy investments in the account once the child passes the state-mandated age and control has not been transferred.
Before transferring a custodial account
Having regular conversations about money in the years leading up to the transfer could help the beneficiary feel prepared. There’s no right or wrong time to start the conversations but it can make sense to start talking about finances early to start building good saving and spending habits.
For some age-appropriate ideas for younger children, read Fidelity Viewpoints: Tips for raising a saver
One way to get teenagers to start saving and learning about investing could be with a Fidelity Youth Account® . Teens can start investing on their own at age 13—with some help from a parent or guardian. Unlike a custodial account, where the custodian makes the investment decisions on the minor’s behalf, the Fidelity Youth Account is a brokerage account that is owned by the teen, who makes all the investment decisions.
How to transfer a custodial account to the owner
The transfer process needs to be started by the custodian. The transfer process will create a new brokerage account for the beneficiary to receive the account assets. A brokerage account is a taxable investment account that allows you to buy stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other types of securities. Read Fidelity Smart Money: What is a brokerage account?
3 ways to transfer a custodial account to the new owner at Fidelity
Each financial institution will have its own rules and processes for transferring the accounts. At Fidelity there are several ways to do it.
1. Transfer the custodial account assets to another account at Fidelity
A quick way to transfer the custodial account is by contacting Fidelity over the phone. The transfer can be done in just 2 steps.
- The beneficiary will need to open a new Fidelity brokerage account.
- Once they have their new account number, the custodian can call and request the transfer. Assets can be transferred in-kind (without selling investments) between the custodial account and the new brokerage account.
Tip: If the new account owner wants the custodian to continue managing investments, they can add them as an authorized user on the account. Even though the ownership is being transferred, the custodian could still be involved. There are 4 levels of access, inquiry, limited, full trading authority, and power of attorney.
2. Complete a change of account registration online
Alternatively, the custodian can complete the change of account registration form. This process involves the custodian filling out information about the owner and an e-signature from the beneficiary.
The new account will be opened and the assets transferred within 5 to 7 business days of completing the form.
3. Send a check or wire directly to the beneficiary
Another choice is to send a check or wire from the custodial account, payable to the beneficiary. This can be processed either online or by calling Fidelity directly for help. Important note: Selling investments to generate cash could generate capital gains or losses for the beneficiary, since they are the owner of assets.
To learn more about taxes and investing, read Managing taxes on Fidelity Learn.
Tools and resources for new investors
To help get new investors off to a strong start and keep going, Fidelity has a library of articles, videos, and tools.
- Practice choosing investments and placing a trade in a risk-free environment with Learn to Invest with Fidelity®.
- Help a recent grad navigate money decisions and stay happy with a game created by Fidelity, 5 Money Musts.
- Learn how to trade with a beginner investor class from the Fidelity Trading Strategy Desk.®
- Visit Investing for beginners and Personal finance for students to get tips on how to invest and manage money on Fidelity Learn.
- Get help managing student loans with the Student Debt Dashboard.
- Fidelity’s social media channels can also help you find answers to questions and money insights.
- Creating a long-term plan for their money can help put the new account owner on the path to success. Fidelity’s free planning tools can help track saving and spending, and help you decide where to put your next dollar.
Setting the next generation up for success
It can be bittersweet to see young people growing up and taking control of their financial lives. Providing ongoing support, education, and guidance can help them make the most of their money and make wise financial choices. Fidelity is here to help with multiple ways to work together.