Start your child\'s wealth-building journey early. Here\'s how custodial accounts work and why index funds are perfect for them.
The most powerful gift you can give a child financially isn't money — it's time in the market. A child born today has 65 years of potential compound growth ahead of them before traditional retirement age. Starting an index fund investment at birth, even with a modest amount, can result in extraordinary wealth by adulthood.
A custodial account — established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) — is a taxable brokerage account opened in a child's name, managed by an adult custodian (typically a parent or grandparent) until the child reaches the age of majority (18 or 21, depending on the state).
Anyone can contribute — parents, grandparents, relatives, or family friends. There are no contribution limits (though gifts above $18,000/year per person in 2026 may trigger gift tax considerations).
For education specifically, 529 plans often make more sense. For general wealth-building with flexibility, custodial accounts are excellent.
A custodial account at Fidelity, Vanguard, or Schwab gives access to all the same index funds available to adults. For a child's account, simplicity is ideal: one Total Market index fund (FZROX at Fidelity or VTI at Vanguard) is all that's needed. The decades-long time horizon makes a 100% stock allocation appropriate.
Be aware of the "kiddie tax" rule: unearned investment income above $2,500/year for children under 19 (or full-time students under 24) is taxed at the parents' marginal rate, not the child's lower rate. This primarily affects custodial accounts with large balances generating significant dividends or capital gains. Consult a CPA if this applies to you.