Are you interested in building generational wealth? If you’ve explored the idea, you’ve probably run across people discussing a custodial account vs. a brokerage account. Let’s compare these two different ways to invest for kids to see which can help you best set up your family for financial success.

Why Should I Help My Kids Invest?

Before we help you determine the best way to start investing, let’s talk about why investing for kids is so powerful. 

Imagine you invest $100 per month when your child is born. Assuming you do this for the first 18 years of their life and their investments earn the stock market average of 8%, their investment account will be worth $44,940 by the time they are 18. That’s a fantastic nest egg that can open a lot of doors for them in adulthood.

Now, let’s say this same investment account is set aside. It isn’t spent on a wedding or a down payment or college. But you and your child no longer contribute to it either. That $44,940 becomes $1,054,404 by the time they reach age 59. You’ve essentially turned your child into a future millionaire with $100 a month in their childhood. No additional investing required! That’s the beauty of compound interest combined with time in the stock market. 

Which Account is Right For Us?

Thanks to that scenario, it’s pretty easy to see the power of investing. So let’s explore one of the investment vehicle options you might consider setting up. 

What is a Custodial Brokerage Account?

A custodial brokerage account is an account that is managed by an adult, known as a custodian, on behalf of a minor. These accounts are often known as UGMA or UTMA accounts. Under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act, you can help invest in your child’s future.

Depending on your state, the age of adulthood is usually 18 or 21. That means until the child reaches the age of adulthood, the custodian manages the account. However, you also want to note that while the adult manages the account, the assets within it belong to the child. 

Custodial Brokerage Account Pros 

There are several key benefits to custodial brokerage accounts. 

One of the most important benefits is the design of the brokerage. Custodial brokerage accounts are set up to benefit a child. That means gifts and funds from other sources can be funneled into the account. All of that money grows to be used by the child later in life. 

While this may sound very similar to a 529 college savings plan, it is worth noting that custodial brokerage accounts can be used for anything. Once the child reaches adulthood, they can use the money for education or any other purpose. 

Another significant benefit of custodial brokerage accounts has to do with tax benefits. Generally, these accounts are taxed at the minor’s tax rate. That tax rate can be significantly lower than the custodian’s rate. 

More specifically, these accounts have tiered taxation thresholds. That means that the first level (currently $1,350 in 2025) of unearned income is exempt from federal income tax. The next level is taxed at the minor’s rate. After that, the “kiddie tax” kicks in. 

Another tax benefit of these accounts is the gift tax exclusion. As of 2025, someone can give up to $19,000 without having to pay a federal gift tax. The $19,000 is per recipient, which means that you can give generously to multiple people. If you are married, that exclusion rate doubles to $38,000 per recipient. 

Custodial Brokerage Account Cons

There are so many benefits to custodial brokerage accounts. However, there are a few drawbacks to consider as well.

The most noteworthy consideration is the fact that when a minor reaches adulthood, they take ownership of the account. There are no guardrails or stipulations on the account. 

While that can be advantageous over a 529 that has to be used for education only, it can certainly pose some challenges as well. Not every 18-year-old (or 21-year-old) is ready and well-equipped to manage tens of thousands of dollars, no strings attached. You can take care of that money cautiously and effectively for nearly two decades only to have it spent on something meaningless. Talk about taking buyer’s remorse to a new level!

Also, a custodial brokerage is viewed as a “child asset” when schools make financial aid considerations. When a student applies for federal financial aid for college, an Expected Family Contribution (EFC) is calculated. 

Assets that belong to the parent are assessed at a maximum of just over 5%. However, child assets are typically taxed at a much higher rate, usually around 20%. That means that a custodial brokerage account can lower the amount of financial aid a student receives. 

What is a Taxable Brokerage Account?

A taxable brokerage account is a no-strings-attached account. Unlike a retirement account, there are no stipulations on how you invest and when you withdraw your money. You don’t have to worry about contribution limits or other restrictions. Instead, you can simply save and invest however you see fit. 

As a result, some families may simply opt to save in a taxable brokerage account, earmarking the money for their childhood when they reach adulthood. Let’s see how these accounts work to better understand the custodial brokerage vs. taxable brokerage debate.

Taxable Brokerage Account Pros 

One of the biggest benefits to taxable brokerage accounts is how easy they are to set up. Virtually all of the most popular online brokerages like Vanguard, Fidelity, and Schwab offer options to open these accounts. Within the account, you can invest in stocks, bonds, ETFs, mutual funds, and more. Because you retain control over the account, it is easy to prioritize options that are low-fee or fee-free. 

Moreso, there are no restrictions on when you can access a taxable brokerage. That means that there are no penalties for early withdrawals or for using it in unintended ways (like a 529). Retirement accounts can rarely be accessed before 59.5 without paying a hefty penalty. 

Finally, account ownership is another big perk. Since the account belongs to an adult, it isn’t automatically transferred to the child when they reach adulthood. If you realize that your child could use some continued hands-on guidance from you, keeping the money in your name might help them avoid a big financial regret. 

That’s why accounts like Mostt are so powerful. Instead of automatically granting access to the child once they reach adulthood, you can determine when they are truly ready to manage the funds. 

Taxable Brokerage Account Cons

Even though there are considerable perks to a taxable brokerage account, you also want to consider the cons. 

There are fewer tax benefits to taxable brokerage accounts. These accounts are not tax-deferred like many retirement accounts and other investment options. That means that if you sell investments within the account, you will trigger capital gains taxes. Depending on how long you held the assets, you either pay short-term or long-term capital gains taxes. That can range from as little as 0% to as much as your current federal income tax rate. 

That doesn’t mean that you shouldn’t open a taxable brokerage account. It simply means you need to consider your investing strategy, including your tax strategy. 

Additionally, because a taxable brokerage is maintained by an adult and considered to be the adult’s assets, that money can be used by the adult for anything. You might open it up with the intention of saving for your child’s future. However, if you find yourself in a tricky situation, you might decide to use the money on something else. 

Custodial Account Vs. Brokerage Account: Which is Better for Investing for Kids?

Overall, we feel that investing in a taxable brokerage account in your name is often superior to a UTMA. The financial aid implications of a custodial brokerage are a considerable downside. Plus, the fact that the kids gain access to the money no matter what situation they are in at the age of majority is concerning in many instances.

To get the best of both worlds as far as custodial accounts vs. brokerage accounts are concerned, consider opening an account with Mostt. These accounts are taxable brokerage accounts set up specifically to invest for children. However, adults continue to control the assets until they are ready to grant the money to their children. A taxable brokerage account, like those with Mostt, helps families build bright financial futures with the best of both types of accounts. 

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Where do you fall on the custodial account vs. brokerage account debate? How are you helping your family build generational wealth? 

Please let us know in the comments below.

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