Acorns Early Review: Custodial (UTMA/UGMA) Accounts for Kids

Acorns Early (custodial investment accounts for kids) lets you invest in the stock market on behalf of your child. You can set them up for success while getting the tax benefits that come with custodial (UTMA / UGMA) accounts. Learn if you should pick Acorns Early over the alternatives.

Anna Ng   Updated February 6th, 2022

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Summary

  • Acorns Early lets you open a custodial account for your child
  • Account type: UTMA/UGMA account
  • Minimum investment: $5
  • Membership fee: $5 / month
  • Investments: diversified portfolios of stocks
  • Sustainable investing options

Pros

  • Custodial accounts let you invest in your child’s future
  • Custodial accounts have tax advantages
  • Start investing with only $5
  • One-stop shop with brokerage, retirement, banking options
  • Educational resources

Cons

  • 529 accounts have more tax advantages
  • $5 monthly fee

What is Acorns Early?

Acorns is a micro-investing app that helps you (and your child) save and invest, starting with only $5. With over 8 million subscribers, Acorns can round up spare change and invest it in portfolios of stocks and bonds. Acorns members save $30 per month on average through round-ups. You can save and invest even more by setting up recurring transfers starting at $5 per day, week or month.

Acorns offers traditional brokerage accounts, retirement accounts, and custodial (UTMA/UGMA) accounts for kids. They refer to custodial accounts for kids as Acorns Early. Unlike savings accounts, custodial brokerage accounts let your child benefit from stock market growth. And having an Early account is a way to get your kid interested in investing.

🔔 Read the full review of Acorns.

What are custodial or UTMA/UGMA accounts?

Parents, guardians, and family members can open a child’s custodial brokerage account. The funds in the account can be used on anything that benefits the child, like tuition, clothes, or sports equipment. The money is transferred to the child when he or she is grown, at the “age of transfer,” usually 18 or 21, depending on your state.

The person who sets up the account is the custodian. He or she decides how to invest the money in the account. Even though the account belongs to the child, the custodian is responsible for paying taxes on it.

Because the money belongs to the child, the custodian can only take it out to spend on things that benefit the child, such as clothes or education. There are no withdrawal penalties. However, taking money out early prevents it from growing and may result in taxable gains. Once the child assumes ownership of the account, they can spend the money how they want.

Custodial accounts vs. 529 college savings plans

529 plans, also known as college savings accounts, let you save for your kid’s education. 529 accounts have tax advantages, but you must spend money on education only. Unlike 529 plans, custodial accounts can be used to spend on anything that benefits the child, not only on education.

Whether you open a 529 or custodial account, you should be aware of potential gift taxes. The key difference is that with 529 plans, you can make five years of contributions at once, providing that you don’t make any more contributions over the next five years.

Gift taxes

There are no contribution limits for custodial accounts, but you may have to pay gift taxes every time you contribute over $16,000 a year to one child. The limit goes up to $32,000 if you contribute as a couple. The giver usually pays the taxes. You should consult a financial advisor if you have concerns about gift taxes.

UTMA / UGMA accounts tax considerations

Gains on the investments in custodial accounts are only taxed when investments are sold. If you have a young child, it may be years before they need to pay taxes.

You would still need to pay taxes on income from interest or dividend payments, but these tend to be small.

Besides, in 2022, there is no tax on the first $1,150 in investment income. The next $1,150 is taxed at the child’s tax rate, which is generally much lower than the adult rate. Any investment income over $2,300 (in 2022) is taxed at higher rates. However, you need to have a lot in the account to hit $2,300 (or even $1,150) in investment income from dividends and interest. Consult a tax professional if you are concerned.

When the custodial account is transferred to your child at the “age of transfer,” they will be paying taxes on capital gains like normal adults. In some cases, they can avoid paying taxes on the first $1,150 in investment gains, though.

Acorns Early portfolios

If you open an Acorns Early account, Acorns will invest the money in a diversified mix of stocks and bonds, just like they would with a regular investment account. However, there are some nuances.

For accounts you would open for yourself, Acorns offers five risk options, from aggressive (100% stocks) to conservative (100% bonds). They help you pick one of these options based on your responses to questions about your investment horizon and risk tolerance.

However, for your child, who has a long investing horizon, Acorns chooses the aggressive portfolio. The 100% stock option helps them maximize long-term gains, even though it can be more volatile in the short run. Short-term volatility doesn’t matter as much if you don’t plan to withdraw the money for years.

Acorns also lets you choose between conventional (Core) portfolios and ESG portfolios that invest in sustainable funds. ESG portfolios should perform in line with conventional funds while having better environmental, social, and governance scores. You can read our review of Acorns’ sustainable portfolios and decide which ones to pick for your kid.

Acorns membership plans

You need to be an Acorns customer to open an Early account.

Acorns offers two membership plans that cost $3 or $5 a month. Acorns Personal, which costs $3 / month, doesn’t support Acorns Early. So to benefit from Acorns Early, you need to open an Acorns Family account.

Acorns Family costs $5 / month and includes custodial accounts as well as personal investment, retirement, and checking accounts, plus a metal debit card that lets you earn rewards. There is no extra fee to open several custodial accounts.

💰 Should you open an Acorns Early account?

  • Opening a custodial account for your child helps you save for their future. In addition to tax advantages, it’s a way to get your child interested in investing and personal finance
  • Because Acorns Family (which includes Acorns Early) costs $5 / month, Acorns Early is the best option if you use Acorns’ other services, such as brokerage, retirement, and bank accounts

NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

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