Investing for Your Kids With a Custodial Account: How Apps Like Acorns Early Work

Most parents want to give their children a head start in life, and few gifts are as powerful as time in the market. Money invested when a child is young has years, sometimes decades, to grow before it's needed. Custodial investing accounts are one of the simplest ways to make that happen, and investing apps like Acorns have made opening one about as easy as setting up a streaming subscription.

Before you open one, though, it's worth understanding exactly how these accounts work, because they come with a few rules that surprise many parents, especially about who controls the money and when.

What a custodial account actually is

A custodial account is an investment account that an adult manages on behalf of a minor. In the United States, these accounts are set up under one of two state laws: the Uniform Transfers to Minors Act (UTMA) or the older Uniform Gifts to Minors Act (UGMA). Most states use UTMA, which allows a wider range of assets to be held, but the two work in similar ways.

The adult who opens the account is called the custodian. The custodian decides how the money is invested and can make withdrawals, but only for expenses that benefit the child. That's because of the most important rule of all: money placed in a custodial account is an irrevocable gift. Once it's in, it legally belongs to the child, not to the parent. You can't take it back to cover your own expenses, and you can't transfer it to a different child later.

How Acorns Early fits in

Acorns Early is Acorns' custodial UTMA/UGMA investing account, available with certain Acorns subscription plans. Parents can open an account for each child, choose a diversified portfolio of exchange-traded funds, and set up recurring contributions so money is invested automatically on a schedule. Acorns has also made it possible for family members, such as grandparents, to contribute, which can turn birthdays and holidays into opportunities to add to the account.

Because the account sits alongside your own Acorns accounts, it's easy to manage everything in one place. As with any Acorns product, check which plan includes Early and what the current subscription costs, so you know the total price of the features you're using.

The part many parents don't expect: the handoff

Custodial accounts don't stay under parental control forever. When the child reaches the age set by state law, commonly 18 or 21 and sometimes later depending on the state and the type of account, the custodianship ends and the young adult gains full control of the money. At that point, they can spend it however they like: on college, a car, a business, a trip or anything else.

For some families, that's exactly the goal: a nest egg that belongs to the child, no strings attached. For others, it's a reason to think twice. If you want more control over how and when the money is used, a 529 education savings plan or a trust might be a better fit. And if you do open a custodial account, it's smart to start talking with your child about money well before the handoff, so they're prepared to make thoughtful decisions when the time comes.

How taxes work

Because the money belongs to the child, investment earnings in a custodial account are generally the child's income for tax purposes. A small amount of investment income may be tax-free or taxed at the child's low rate. Above certain thresholds, however, the so-called kiddie tax rules can cause additional unearned income to be taxed at the parents' tax rate. The thresholds change over time, so check irs.gov or ask a tax professional if your child's account grows large or generates significant income.

Custodial account or 529 plan?

Many parents weigh custodial accounts against 529 plans, the tax-advantaged accounts designed for education. The two serve different purposes. A 529 plan offers tax-free growth when the money is used for qualified education expenses, and the parent who owns the account generally keeps control, even after the child turns 18. A custodial account offers flexibility: the money can be used for anything that benefits the child, not just school, but it has fewer tax breaks and the child eventually controls it.

Financial aid is another important difference. For federal student aid, custodial accounts are generally treated as the student's asset, which can reduce aid eligibility more than a parent-owned 529 plan. If college funding is your main goal, a 529 plan is often the more efficient choice. Some families use both: a 529 for education and a custodial account for broader goals.

Turning the account into a lesson

One of the best things about a custodial investing account is that it can double as a teaching tool. As your child gets older, show them the account, explain what an investment is, and talk about why the balance goes up and down. Letting them see how regular contributions and patience lead to growth can be a lesson that lasts far longer than the money itself.

Some parents match a portion of their child's own savings from allowance or a summer job, which reinforces the habit of saving. Others review the account together once a year, perhaps on the child's birthday. However you approach it, involving your child turns an abstract balance into a real-world lesson in how wealth is built.

Before you open an account

Start by deciding what the money is for. If it's mainly for college, compare a 529 plan first. If you want flexibility and are comfortable with your child taking control at adulthood, a custodial account like Acorns Early can be a simple, automatic way to build a nest egg. Either way, the earlier you start, the more time the money has to grow.