| Account type | Who controls it | Tax treatment | What can go in | Best for |
|---|---|---|---|---|
| UTMA custodial | Adult custodian until you reach majority (18-21 by state) | Child's investment income above small thresholds is taxed at the parent's rate (kiddie tax) | Gifts of cash or securities | A flexible gift pot for any goal |
| Custodial Roth IRA | Adult custodian, but it is legally the child's | Grows and (after rules) withdraws tax-free | Only EARNED income, up to the annual IRA limit | A teen with a real job and decades of tax-free growth |
| Joint brokerage | Both names on the account | Ordinary taxable account; gains taxed when sold | Any cash or securities | Learning to invest together with a parent |
Custodial accounts become the child's property at the age of majority (18-21, depending on the state). Once you are an adult the money is legally yours to use for anything, and the parent cannot claw it back. Decide together whether that is the right vehicle for a large gift.
Maya babysits and does yard work, earning $2,400 in a year. She can contribute up to $2,400 to a custodial Roth IRA -- her contribution is capped at the lesser of her earned income or the annual IRA limit, and since she earned less than the limit, her own earnings are the binding cap. If she earned nothing, she could contribute nothing, no matter how much her parents wanted to gift. Keep a simple log of the work and pay; the IRS expects the income to be real.
Sit with the ideas.
Which account lets a working teen's money grow and later be withdrawn tax-free, but only accepts EARNED income?