An UTMA and UGMA are custodial accounts with flexible spending

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An UTMA or UGMA is an investment account that officially belongs to your child.
The rules surrounding how you spend money from an UTMA/UGMA are pretty flexible.
You can invest in the market with an UGMA; you can also put real assets like a house into an UTMA

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An UTMA (Uniform Transfer to Minors Act) or UGMA (Uniform Gift to Minors Act) custodial account could be a good way to invest in your child’s future.

By opening an UTMA or UGMA, you can invest money and watch your child’s savings grow. Your child can use the funds to pay for college as they might with a 529 plan, but they can also spend the money on expenses other than education.

What is an UTMA/UGMA?

UTMAs/UGMAs accounts are taxable custodial accounts set up by parents or guardians for the benefit of a minor. Assets in these accounts are considered “irrevocable gifts,” which means the account technically belongs to the child, not to the adult who sets up the account. Therefore, any contributions and earnings are considered gifts to the child that can’t be taken away.

When you set up an UTMA/UGMA for your child, you don’t own the account. You can’t use the funds for anyone other than the child, and you can’t transfer the account to yourself or to another child. An UTMA and UGMA have some benefits over a traditional savings account because your contributions have the potential to grow.

“The idea is, it’s an irrevocable gift where we can put money into the market and it grows, keeps up with inflation, has exposure to different market environments,” Dexter Wyckoff, a financial planner for Northwestern Mutual, told Insider.

Your child will have access to the account when they turn the age of majority. The age of majority varies by state, but in most cases, it’s 18 or 21 in the US. Once the child owns the account, it’s no longer an UTMA/UGMA — it becomes a taxable brokerage account, and the rules for a taxable brokerage account then apply.

Who should open a UTMA/UGMA?

UTMAs and UGMAs are best for parents and guardians wanting to save for a child/minor’s future but aren’t sure if the money will be used for college or university. Unlike 529 plan accounts, which are specifically for college savings and higher-education expenses, UTMA/UGMA accounts offer more flexibility.

So if you want your child to have control over how they spend the money later in life and don’t want the legal hassle of setting up a trust, you may want to consider opening either an UGMA or UTMA investment account.

But these accounts aren’t ideal for folks wanting the option to transfer the assets from this account to themselves or another child. Nor is it a good option for families interested in the tax benefits offered through 529 plans.

UTMA/UGMA pros and cons

UTMA vs. UGMA: What’s the difference?

Trying to decide between an UTMA and UGMA? The two accounts are very similar, but they have two key distinctions: where you can open an account, and whether you can contribute real assets like real estate.

You can open a UGMA in all US states

UGMAs are available in all 50 US states, but you can’t open a UTMA in South Carolina or Vermont. If you live in either of these states, you’ll have to go with an UGMA.

You can put real assets into a UTMA

The main difference between UGMA and UTMA accounts is that UGMA’s are limited.

“You can buy stocks, you can buy bonds,” Wyckoff said, “you can have a savings account, you can invest in mutual funds … but I could never put property into an UGMA account. I could never put a car into an UGMA account.”

UGMA accounts do allow the following properties:

CashStocksBondsMutual fundsOther financial products

Only UTMA accounts allow real assets like real estate and cars.

“One of the reasons why we do this is because an irrevocable gift is protected from my creditors and other family members or things like that,” Wyckoff said. “So a lot of times, there’s a situation where there’s a big estate, and the child just isn’t at the point where they can make their own decisions, but they have a parent pass away. Sometimes people will transfer real assets into an UTMA so that it is the child’s, it is protected from creditors, and it is irrevocable.”

You could leave real assets to your child with a trust — but an UTMA could be a better option for people who can’t or don’t want to go through the legal process of setting up a trust.

“Not all families are in a position to put trusts in place,” Wyckoff said. “There’s a legal process you have to go through sometimes, and it’s expensive. The UTMA is a designation that has been created for us by the IRS. And you just open the UTMA, and you assign the asset to it. Simple.”

How can you spend the cash from a UTMA/UGMA?

You may choose to use an UTMA/UGMA as a college savings plan, as you would with a state-sponsored 529 savings plan. But UTMAs/UGMAs provide much more spending flexibility than 529 plans. You don’t have to use the funds for educational purposes — you can use them for anything that benefits the child, from birthday parties to music lessons to summer camps.

“The IRS just would want to substantiate that it was for the benefit of the child because it is an irrevocable gift,” Wyckoff said.

This flexibility is good if you aren’t sure your child will need funding for college. Maybe your child doesn’t go to college, or maybe they receive a full scholarship. This way, your kid can still benefit from the account regardless of which path they take in life.

Any UTMA/UGMA rules about spending money become moot once the account is transferred to the child at the age of majority.

“It’s no longer an UTMA/UGMA, it’s just a taxable brokerage account, and they can use the money for whatever they want,” Wyckoff said. “The restrictions are while the parent is controlling the assets for the minor.”

How is a UTMA/UGMA taxed?

Unfortunately, UTMA/UGMA accounts don’t offer the same tax advantages that 529 plans have. Instead, these accounts are subject to what’s known as the “kiddie tax.” Under this tax rule, the first $1,150 of a child’s unearned income — such as income from interest or dividends in the account — is tax-free, and the next $1,150 is subject to the child’s tax rate.

With that, if the child’s unearned income is below $2,300 in a year, you’ll pay taxes for the child’s tax bracket for trusts and estates, which for most people is low or even nothing. But if the child’s unearned income exceeds $3,200, you’ll likely have to pay taxes on the unearned income, according to the tax brackets for estates and trusts for the parent.

If your child’s only income is unearned and it totals less than $12,950 in a year, you have the option to include the amount in your annual tax return rather than file a separate return for the child.

Taxes can be difficult for many people to understand, so Wyckoff recommended people talk to a financial adviser and/or tax specialist before opening an account.

How does a UTMA/UGMA affect financial aid for college?

If your child attends college, you may need to fill out the FAFSA for them to receive financial aid.

On the FAFSA, you’ll list:

parents’ or guardians’ assetsThe child’s assets

The FAFSA assumes you’ll use 20% of the child’s assets to pay for college; it assumes parents’ contributions on a bracketed system, with the maximum assumption of just 5.64%. So a child could receive less financial aid with an UTMA/UGMA than if the only assets held and listed belong to their parents.

You do have the option to convert an UTMA/UGMA into a 529 plan so you can list it as a parental asset. You’ll likely want to speak with a financial adviser before converting, though, because there are pros and cons to taking this step.

Should you open a UTMA/UGMA?

UTMA/UGMA accounts are best for parents/guardians who want to save money on a minor behalf, but aren’t sure if the assets in the account will be used to pay for college. These custodial accounts offer spending flexibility, no withdrawal limits, and are much easier (and cheaper) to set up compared to trusts.

But UTMA/UGMA accounts don’t offer some of the same tax advantages as 529 plans. If you’re certain that your child/minor will be using the funds to pay for school, then a 529 plan or other college savings account is probably better.

Laura Grace Tarpley, CEPF

Personal Finance Reviews Editor

Laura Grace Tarpley (she/her) is a personal finance reviews senior editor at Insider. She oversees coverage about mortgage rates, refinance rates, lenders, bank accounts, investing, retirement , and borrowing and savings tips for Personal Finance Insider. She was a writer and editor for Insider’s “The Road to Home” series, which won a Silver award from the National Associate of Real Estate Editors. She is also a Certified Educator in Personal Finance (CEPF).
She has written about personal finance for seven years. Before joining the Insider team, she was a freelance finance writer for companies like SoFi and The Penny Hoarder, as well as an editor at FluentU. You can reach Laura Grace at [email protected].
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