BUSINESS

Custodial account fees tend to be low, but can vary among brokerages and financial institutions

Fact checked by Brendan Harkness

A custodial account is a special savings or investment account that one person opens for the financial benefit of another. In many cases, a parent or guardian opens a custodial account to give money to or invest money for a minor. Parents can use it to build savings for a child, to allow other family members to make financial gifts to that same child, or to teach their child about investing at a young age. 

If you’re considering a custodial account, it’s normal to wonder about the potential expenses you might face along the way. Custodial account costs are typically low, but they can vary based on the broker or financial institution you work with and the type of custodial account you choose to open.

There are two common types of custodial brokerage accounts: Uniform Gift to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. The primary differences have to do with the types of assets you can contribute to each. Here’s what you need to know about custodial accounts for minors and their associated costs.

Key Takeaways

• A custodial account is opened by one person for the benefit of another.
• Fees for a UGMA custodial account, which allows minors to receive financial gifts without a trustee, are similar to deposit and investment accounts.
• Fees for UTMA accounts, which let you transfer different assets to minors, tend to vary based on the provider.
• Both accounts are taxable and come with certain tax benefits.
• While there are no income or contribution limits to these accounts, you cannot change the beneficiary once the account is established.

UGMA Custodial Account

The Uniform Gift to Minors Act is the name of a law that lets minors receive financial gifts without the need for a trustee. You can use a UGMA account to give financial assets to a minor, like a child or grandchild. Some examples of assets you (and other family members or friends) can contribute to a UGMA include cash, stocks, bonds, certificates of deposit (CDs), index funds, mutual funds, and more.

Costs Associated With UGMA Accounts

Custodial accounts, like UGMA accounts, can include fees like any other deposit or investment account you open. So, it’s important to pay attention to the fees that a brokerage firm or financial institution charges to find the best UGMA account for your child’s needs. 

Some of the fees and requirements associated with a UGMA account may include: 

• Monthly maintenance fees
• Annual fees
• Account minimums
• Trade fees
• Commissions
• Transfer fees

Important

The best UGMA account providers generally charge no monthly maintenance fees or annual fees, have no account minimums, and permit the purchase of fractional shares.

UTMA Custodial Account

The Uniform Transfers to Minors Act is another law that gives minors the ability to receive financial gifts and other valuable assets without the need for a special trust fund. The UTMA came after the UGMA, and not only lets minors receive gifts of financial assets (like cash, stocks, bonds, mutual funds, etc.), but also real estate, fine art, and other types of property. 

Costs Associated With UTMA Accounts

The cost of a UTMA account can vary just like any other type of investment account or deposit account you open. Therefore, it’s important to shop around and compare fees from multiple brokerage firms or financial institutions before you open one. 

You should watch out for the same kinds of expenses mentioned above for UGMA accounts. Be sure to read the fine print so you don’t miss any important details that could impact your overall costs. 

Tax Requirements of Custodial Accounts

Fees from your brokerage firm or financial institution aren’t the only expense to consider. It’s also important to understand tax requirements associated with custodial accounts and who’s responsible for paying taxes on any income those assets generate while the beneficiary is still a minor. 

Both UGMA and UTMA custodial accounts are taxable investment accounts, which means they are not tax-advantaged. But, since the child owns the custodial account, the initial earnings it generates should fall under the child’s lower tax rate rather than the parent’s typically higher tax bracket. However, there are limits.

Here are some potential tax benefits of using a UGMA or UTMA account for eligible minors (children under 19 or full-time students under 24 years old):

• Up to $1,350 in custodial account earnings may be exempt from federal income tax.
• Pay federal taxes at the child’s tax rate for the next $1,350 in earnings. 
• Pay federal taxes at the parent’s tax rate for any earnings above $2,600. 

Important

For questions about specific tax situations, you should always consult with a licensed tax professional. 

Pros and Cons of Opening a Custodial Account

If you’re considering opening a UGMA or UTMA account for your child (or anyone else), it’s wise to consider the advantages and disadvantages first. Here are some important facts you should know.

Pros

• No income or contribution limits 

• Flexibility to invest in a variety of assets 

• Less expensive to establish than a trust fund 

• Features special tax benefits 

Cons

• May reduce a child’s eligibility for college financial aid 

• Not tax-deferred 

• Deposits and gifts are irrevocable (they cannot be reversed or changed) 

• Cannot change the account beneficiary

Compare the Best Custodial Accounts

It’s important to research your options before opening a deposit account. Learn more about why we picked the accounts above here: The Best Custodial Accounts.

Is It Worth Opening a Custodial Account?

There are advantages and disadvantages to opening custodial accounts for minors. You can use these accounts to take advantage of certain tax benefits and even to teach your child about investing at a young age.

At the same time, custodial accounts present certain risks, like the chance of impacting the financial aid your child may be eligible to receive at a later date. Therefore, it’s important to do your own research before you decide whether opening a custodial account is the right move for your child.

How Much Money Can a Custodial Account Hold?

There’s no limit to the amount of money a custodial account can hold. However, each donor may only give a beneficiary up to $19,000 per year ($38,000 for married couples filing jointly) if they wish to avoid triggering federal gift tax implications from the IRS.

Who Owns the Money in a Custodial Account?

The beneficiary is the owner of the assets in a custodial account. However, until the beneficiary reaches the age of adulthood in their state, the custodian has control over how to invest the money in the account. 

Once the child turns 18, it’s important to have certain legal paperwork in place (with the child’s consent) so you can continue to offer support with financial matters, medical situations, school, and more. 

What Is the Tax Rate for a UGMA/UTMA?

For 2025, a minor can earn up to $1,350 in unearned income from custodial account investments without having to pay federal income tax on those funds, according to the IRS. In general, the next $1,350 in earnings is subject to the child’s tax rate, and earnings above $2,600 are subject to the parent’s tax rate. However, it’s always wise to speak with a tax professional if you have questions about your specific tax situation.

The Bottom Line

Custodial accounts allow adults to help their kids (or grandkids) start saving without needing a trustee. If you open one, you’re responsible for managing it. This means that you make all the investment decisions and decide how the money will be used. While there are no income or contribution limits, you must keep in mind that the account can only be used for the benefit of the named beneficiary. Once named, you can’t change it to someone else. And if you plan on applying for financial aid for school, the balance in the account could reduce any funding you receive.

Some HELOC loans have repayment penalties

Fact checked by Amanda Jackson

A home equity line of credit (HELOC) is a way of accessing the equity that you’ve built up in your home. With a HELOC, you use your home as collateral for a line of credit. The amount of credit available to you depends on factors like the amount of equity in your home, your credit score, and your debt-to-income (DTI) ratio.

HELOCs can offer several advantages, but they have costs to consider. For example, if you want to pay the balance off early, you could face penalties. Though these charges may not always be labeled as a prepayment penalty, as they are with home equity loans, they function in the same way.

Key Takeaways

• A HELOC is a way to access the equity you’ve built up in your home, using your home as collateral.
• HELOCs usually have lower interest rates than other types of loans, but the downside is that you could lose your home to foreclosure if you fail to repay the loan.
• Most HELOCs have no prepayment penalties, but some lenders may charge a prepayment penalty to compensate for the loss of the interest they would have earned if the loan had been paid through the full term.
• Before agreeing to a HELOC’s terms, you should read the fine print to learn about any prepayment penalties and consult a professional advisor if necessary.

Understanding HELOC Loans

To understand why some HELOC loans have closing costs, we must look back at their history. When HELOC loans were first conceived in the 1980s, they worked as revolving loans, using the borrower’s home equity to secure the loan.

Some states had laws that made HELOCs illegal as revolving loans: if a borrower paid off their loan, then the lender had the obligation to release the lien on their house. Also, mortgages that didn’t come with an explicit term were prohibited in some states. To be legal nationwide, HELOC agreements had to come with a specific payoff date. As a result, the consensus was that HELOCs could have prepayment penalties.

Lenders set prepayment penalties as a way to protect their funds. A lender makes money on the loan through interest paid by the borrower each month throughout the loan term. If a HELOC loan is closed early, the lender won’t earn the expected profit generated by the interest. In other words, lenders use prepayment penalties to compensate for lost interest.

Important

Some people turn to a HELOC to consolidate high-interest debt. However, if you are having trouble paying your bills, consider the downsides. If you cannot make your HELOC payments, you could put your home at risk of foreclosure.

HELOC Prepayment Penalties

Some HELOC loans have some kind of prepayment penalty or a fee associated with paying off your HELOC early.

HELOCs are structured as multiyear contracts, and you can be charged a flat fee when you close your account, regardless of your account balance. This fee will apply if you open a HELOC, then pay it down and close it before the period specified in your loan terms. 

In other cases, the lender’s terms will allow them to recapture closing-cost fees from HELOC borrowers who close their credit line within a specified period, often within two to three years, after the loan begins. Lenders might document the waived closing costs or charge a flat fee that approximates the original costs.

HELOC loans can vary significantly in this regard. Be on guard for unscrupulous lenders that will charge high fees as you read the fine print. The federal Truth in Lending Act (TILA) requires lenders to disclose all the terms and costs of their home equity plans, including prepayment penalties.

You should also seek expert help if you are unsure if a loan is right for you. You can check whether a housing counselor is approved by the U.S. Department of Housing and Urban Development (HUD) or find a HUD-approved housing counselor by visiting HUD’s website or calling HUD’s housing counselor referral line at (800) 569-4287.

Do HELOCs Have Prepayment Penalties?

Most HELOC loan agreements won’t mention prepayment penalties. However, some HELOC loans will charge fees that are essentially an early repayment penalty. Make sure that you read the fine print, and consider consulting a professional advisor before paying off the HELOC early.

Can I Repay a Home Equity Line of Credit (HELOC) Early?

You can repay a home equity line of credit (HELOC) early, but you might have to pay penalties. You should check your loan agreement to see if early repayment penalties apply to you, and whether they will make paying back your loan early more expensive.

Can I Avoid HELOC Prepayment Penalties?

It depends on the terms of your loan. Make sure to read the fine print before taking out a HELOC to avoid any surprises. Talk to a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor if you are unsure whether this type of loan is right for you.

The Bottom Line

Many HELOC loans have no early repayment penalties. However, some loans may have these kinds of fees. It’s important to read the fine print before agreeing to a HELOC and to seek expert advice if you are unsure about the terms that you are being offered.