Robinhood custodial account
How do you create generational wealth? Can you use a Robinhood custodial account? What other sorts of custodial accounts are available to help you invest money for your children or other minor family members? We will cover all of this and more in this article. Let’s go!
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Table of Contents
What is a custodial account?
A custodial account is an investment account set up for a minor, typically under the age of 18, that is managed by an adult custodian. This type of financial account allows parents to save money for their children’s future while teaching them about sound financial management. The custodial account specifically allows minors to invest in stocks, ETFs, and cryptocurrency without incurring any commissions or fees.
The custodial account enables parents to open an investment portfolio on behalf of their child without having to pay transfer fees or annual maintenance fees like with other brokerages. Additionally, parents can add funds in the form of gifts and transfers from other accounts and will receive statements containing performance information so they can monitor their child’s investments. Furthermore, there are no minimum opening deposits required when opening this type of account.
Ways to pass wealth down to your children or grandchildren
What are the ways that you can pass down wealth or invest regularly for your children or grandchildren? There are three (maybe four) ways that I am aware of to do this and each has advantages and disadvantages.
UGMA / UTMA
- Uniform Gift to Minors Act (UGMA) Account: A UGMA account is a type of custodial account where the account holder can contribute cash, securities (financial items you can invest in, such as stocks and bonds), and insurance policies. This is available in all 50 states.
- Uniform Transfer to Minors Act (UTMA) Account: A UTMA account is a type of custodial account where the account holder can contribute any type of investment. Like the UGMA accounts, owners can contribute cash and investments. They can also put physical assets such as real estate into these accounts. This is not available in all 50 states, so the UGMA may be your only option depending on where you live.
UGMA allows you to put up to $32,000 a year per the gift tax in US law. If you are a couple you can give up to $64,000 a year. Note that this is yearly so if you have 4 people you want to gift money to in a UGMA then your total gift for everyone cannot exceed $32,000.
The advantage of these accounts is that you can invest the money in pretty much any fund that is available in an IRA. I would recommend an index fund like the total stock market or the S&P 500. Read more about index funds and all of the different options you have for investing here.
The disadvantage of these accounts is that you will need to pay taxes on the earnings of the account and it is a little complex. For a full article on UGMA / UTMA taxes go here. In a nutshell, the first $1,100 in earnings from these accounts are free. The next $1,100 is paid out at the child’s tax rate (also typically free). Anything else after $2,200 a year will be taxed at the owner of the account’s rate.
The other disadvantage is that any money withdrawn will be taxed as well. So if they decide to use the money for college they will withdraw this money as income tax which could be expensive. And any money in these accounts would count toward the child’s net worth for the purposes of calculating any college grants. This could potentially mean that Pell and other grants would be denied if there is a lot of money in these accounts.
Finally, once the child turns 18 or 21 (depending on the state) the UGMA or UTMA is 100% legally theirs. Can you imagine what you would have done with let’s say $1,000,000 at 18? Yeah, not a pretty picture. So many will try to convert this over to a trust before then but that can be expensive.
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529 Plans
There are two types of 529 plans:
- 529 college savings plans are the most common type. Investments grow tax-free and can be withdrawn tax-free for educational expenses such as tuition, room & board, and required textbooks.
- 529 prepaid plans let you prepay part or all of in-state public tuition, locking in the tuition at the time of payment.
The advantage of this account is that it can be used for any child or grandchild and isn’t necessarily tied to a named individual so if you had 3 grandchildren and the oldest decided to not go to college then that money could be used for the other two. That is not the case with any of the other options listed here.
The disadvantage is that it can only be used for college education and related expenses tax-free. If you decide to use this money for other things it is taxed like income. Also, many states have a cap as to how much money can be saved through this method, and if you have more money in there than is allowed your earnings are just taken by the state.
This is not a way to provide generational wealth, but rather offset the cost of college. The other disadvantage is that no one knows if college will be worth it in the coming years as more and more companies have stopped requiring it. I foresee that colleges will need to totally revamp themselves in the next 20 years for them to be relevant.
If you want to know more about 529 plans then read this article from NerdWallet. It also lets you know where you can set up an account in each state.
Cash Value Whole Life Policies
I go into this in-depth in my article on being your own bank. The concept here is to open up a specialized whole-life account that builds cash value. I will say that this is expensive to implement and won’t do as well as a UTMA or UGMA if you were to put it into the total stock market or similar index fund. But these are guaranteed returns yearly and also are 100% tax-free. You can also remove money from the account as it is seen as a loan against the life insurance policy and therefore is also tax-free.
The advantage of cash value whole life insurance policies is that the cash value can be used for anything from schooling to buying a home, going on vacation, or potentially buying a duplex or quadplex for them when they turn into an adult and rent out the other sides to bring them in passive income. This money is post-tax and seen as a loan against the policy so it isn’t taxed. You can choose to pay back the loan or that money will be deducted when you die.
The money that you borrowed can still make money because it is considered a loan and not a withdrawal. Yes, this means you can withdraw $40,000 and still make the guaranteed 6%+ on that $40,000 because the insurance company could always get their money back if you were to die.
The money in this cash value policy does not count against the child or grandchild for school grants like the UTMA or UGMA does.
The main disadvantage is that you will need to buy a whole life insurance policy and then overfund it for 10 or more years and probably pay on it regularly for 20 years. Then after that, the policy can be written in such a way as to fund itself. You see you have to keep paying on a whole life insurance policy forever. But the earlier you get it in life the cheaper it is and if you come up with a disability you are still insured at the rate you took it out at. So I got one for my granddaughter when she was 8 months old when she is in perfect health. And let’s face it most of us are in the best health in those first early years and it is just downhill from there.
In addition to the long-term payments that you cannot afford to skip you will also pay more for fewer gains on this than investing in the stock market in a UGMA or 529 plan, but the gains are guaranteed at the beginning of each year. If they fall short then the life insurance company will make up the difference. If they do better than expected you will be paid more. But the rate of growth is typically around 4% – 8% depending on the market conditions.
If you want to read more about this pick up the book “What Would the Rockefellers Do?: How the Wealthy Get and Stay That Way, and How You Can Too” by Garrett Gunderson.
Roth IRA
This is a bonus 4th way but it only works if the teenager is working. Then they could deposit up to 100% of the money they earned into a Roth IRA. The reason to use a Roth IRA versus a Traditional IRA is that your teenager will pay almost nothing in taxes anyway on this money because they will probably make less than the standard deduction. So why not put up to 100% of that earned money into a post-tax (Roth) IRA? Now they can pull that money out tax-free after 59 1/2 (or any of the principal that is invested at any time).
$6,000 invested by the time they are 18 years old could grow to almost half a million dollars by the time they turn 67 year old. This assumes a 9.4% annual rate of return which is the average of the last 50 years in the S&P 500 index fund.
If the market in the next 50 years follows the last 50 (and no guarantee of that) and you don’t contribute any more money to any other retirement accounts then you would have an estimated $489,779.60 at 67 if you had put in $6,000 when you turned 18 into a Roth IRA. The best part of that is that 100% of this money would be tax free at 67 years old.
But what happens if you invest just $50 a month at the age of 18? $1,030,284.30 and that is the power of compound interest over time.
The advantage of this is that legally you could let the teenager keep the money and then put in up to 100% of their net earnings in a Roth IRA for them. Or come up with a split of what percent you will match if they invest at a young age. The big advantage is that the money can and should be put into a Roth IRA (up to $6,500 in the calendar year of 2023) and that money will be 100% tax-free when they turn 59 1/2.
The disadvantage is it is tied to the amount of money they make from a W2 or 1099 job. So in my state of Colorado, a teenager can start to work at 14 years of age (with highly restricted hours per week). At best then you would have four years to be able to put in money for them and again it would be limited by the amount they make. The other disadvantage is it is only up to $6,500 in 2023. So if they were able to make $10,000 from a job that year they could only invest (or you could only give them) $6,500 to put in their IRA. Note that giving money like this would fall under the gift tax exemption I covered briefly in the UGMA / UTMA section above.
Can I make a Robinhood account for my child?
No, Robinhood or WeBull or other similar accounts currently do not offer custodial accounts for children.
What is the best investment account for a child?
Personally, I think you should look into a UGMA or Whole Life Insurance with Cash Value or both. I have set up both for my granddaughter.

What stock apps allow a custodial account?
You will have to use a major brokerage like Vanguard / Fidelity / Charles Schwab to set up a UGMA.
For Cash Value Whole Life Insurance I use Mass Mutual. If you are interested in this email me at Dwight@DwightScull.com and I can see if the people I use can help you. You have to be licensed by the state to set these up so let me know what state you live in. You should also know I am paying over $7,000 a year for this policy and started when she wasn’t yet 1 year old. This locked her into over half a million in life insurance and will have about $40k in cash value before she is 10 years old that I could use to help her parents purchase a home for example.
Do you have to pay taxes on a custodial stock account?
For a UGMA / UTMA yes you will have to pay taxes on any earnings after $1,100 to $2,200 at the child’s tax rate (so could be free if they aren’t working) and anything over $2,200 will be paid at your income tax amount.
If you are investing in a 529 account then those are done pre-tax for the parents but post-tax for anyone else contributing to the fund. The money is taken out tax-free as long as it is spent on school tuition and fees, room and board, and books.
Cash Value Whole Life Insurance is not taxed as you pay into it with post-tax dollars. Life insurance is paid out tax-free (full IRS rules here).
Roth IRA is by nature tax free. If you want to know more about Traditional vs Roth IRA’s read my article about that here.
Who pays taxes on a custodial account?
For a UGMA / UTMA the first $1,100 of earnings are free. The next $1,100 of earnings are paid at the child’s tax rate and many programs should have a option to pay the taxes out of the UGMA / UTMA, but to be fair unless the child is working the first $2,200 of earnings are free. Then anything it makes after that would be taxed at the custodian’s income tax rate at the highest amount.
What earnings could this be?
Well if you invest in dividends and don’t reinvest them back into the fund then this could be one way that these accounts create earnings that would have taxes on them because you invest in a UGMA / UTMA with post-tax dollars. Also withdrawing the money for the interest of the child before they are 18 could also incur a taxable event.

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
— Robert Kiyosaki, Rich Dad Poor Dad
Can I set up stock account for my kids?
Yes, use a UGMA / UTMA from Vanguard or Fidelity. You can choose individual stocks, index funds, mutual funds, bonds, and potentially other options. If you want to know more about what each of those terms means see my article on how to invest on autopilot here.
Join my free Facebook group to get a ton of free resources to help you get out of debt, learn how to invest your money, and work toward having the option of retiring early.
Can a 5 year old invest in stocks?
Yes and no. You can set up a UGMA / UTMA from Vanguard or Fidelity. You can choose individual stocks, index funds, mutual funds, bonds, and potentially other options. If you want to know more about what each of those terms means see my article on how to invest on autopilot here.
How can a 11 year old invest in stocks?
You can set up a UGMA / UTMA from Vanguard or Fidelity. You can choose individual stocks, index funds, mutual funds, bonds, and potentially other options. If you want to know more about what each of those terms means see my article on how to invest on autopilot here.
Wow, you read a lot to get here. Can you do me a favor, please? Can you leave a comment if this was helpful to you or if I missed something? Alternatively, it would help me out a lot if you shared this content with those that might need to see it. Thanks, you are the best!
Can I day trade on a custodial account?
I do not recommend day trading at all. Most (90%+) lose money on day trading. You are opening an account for your child.
Investing in the stock market should be like watching paint dry or grass grow per Warren Buffet.
The other thing that a custodial account has that many don’t is that this account could be open for over 60 years before it is used for retirement. That means that you have time in the market and that is the most important rule to investing.

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It isn’t about timing the market but time in the market.
Can I set up a Robinhood custodial account?
In summary, no you cannot set up a Robinhood custodial account in 2022. I didn’t see that they have current plans to set this up in 2023 as there are other laws from the federal government for investing for minors. That said there are four options to invest money for your child.
The closest thing to using Robinhood would be opening a UGMA in Fidelity or Vanguard. I would put money in an index fund as it has the lowest fees and the most diversification. I invested in the total stock market fund in Fidelity for my granddaughter. You should be able to deposit money in this account automatically if you have direct deposit.
You can save for college by using a 529 fund and if you are the parent that can be done with pre-tax dollars. You should be able to deposit money in this account automatically if you have direct deposit.
Alternatively, you can look into Cash Value Whole Life Insurance which has a number of benefits for taxes and guaranteed returns. It costs more per month and you cannot miss a regular payment. I see this as the best option to create generational wealth. If you want to read more about this pick up the book “What Would the Rockefellers Do?: How the Wealthy Get and Stay That Way, and How You Can Too” by Garrett Gunderson.
The last option is to match or encourage your working teenage child or family member to invest in a custodial Roth IRA. They can put as much money as they make during a year up to $6,500 in 2023.
Of course, you can do any or all of the above, but make a plan if you want to help invest money for your child to start one of these today.

Choose your hard.
Obesity is hard. Being fit is hard.
Choose your hard.
Being in debt is hard.
Being financially disciplined is hard.
Choose your hard.
Communication is hard. Not communicating is hard.
Choose your hard.
Life will never be easy. It will always be hard.
But we can choose our hard. Pick wisely.”
About Dwight Scull
I have been married to my wonderful wife, Rebecca, who puts up with me since 1999. I am a proud father to my Gen Z, son, and daughter-in-law. Grandfather to my favorite granddaughter who was born in 2021.
I lost my mom, father-in-law, and 12 others in 2013 and was DEEPLY in debt. I started reading and watching all the financial info I could find.
I chipped away at my debt and went from a negative $105k net worth having one home paid off, no credit card debt, and saving/investing 45%+ of my gross salary.
I used these daily habits to lose 100 pounds and keep it off.
I believe that you can overcome any challenge you face if you just take small daily actions and be consistent with them. It is how you will be financially successful.
Join my free Facebook group to get a ton of free resources to help you get out of debt, learn how to invest your money and work toward having the option of retiring early.