UTMA and UGMA accounts are custodial accounts that allow you to save and transfer financial assets to a minor without establishing a trust. Both are held in the name of the minor, but controlled by a parent or other relative until the child reaches adulthood (the age of majority in your state). Show
UTMA stands for Uniform Transfers to Minors Act, and UGMA stands for Uniform Gifts to Minors Act. Knowing the acronyms is great, but it’s important to fully understand how UTMA and UGMA accounts work, their benefits, and how they compare to 529 plans, before opening one. UTMA/UGMA Account vs 529: Impact on Financial AidCompared to 529 college savings plans, an UTMA or UGMA account has a less favorable financial aid impact. When it comes time to fill out the FAFSA (Free Application for Federal Student Aid), UGMA and UTMA accounts are reported as a child’s asset, reducing aid eligibility by 20% of the asset value. Since 529 plans are usually reported as a parental asset, they reduce aid by up to 5.64% of the asset value. Use our Financial Aid Calculator to estimate your expected family contribution (EFC) and financial need based on student and parent income and assets, family size, number of children in college, age of the older parent and the student’s dependency status. UTMA and UGMA Account Taxes and Contribution LimitsUTMA and UGMA accounts do not have the tax benefits that a 529 plan offers. Contributions are made with after-tax dollars. You can contribute up to $16,000 annually without incurring a gift tax ($32,000 per married couple). The first $1,150 of a child’s unearned income is tax-free. The next $1,150 is taxed at the child’s rate. Anything over that is taxed as the parent’s income. This trust fund calculator determines the net present value (NPV) of a trust fund to help you value the trust fund for reporting it as an asset on the FAFSA. Flexible SpendingHowever, UGMA and UTMA accounts provide more flexibility in how the funds can be used compared to a 529 plan. When it comes to using the funds in a 529 plan, to avoid a penalty, you’ll need to use it for specific educational expenses, including tuition, books, supplies and a computer. The funds in an UGMA/UTMA account can be used for anything. While your child is still a minor, you can use the funds in a UTMA or UGMA account to pay for expenses that benefit the child, such as clothes for school and summer programs. UGMA Age of Majority by StateOnce your child reaches adulthood, the UGMA funds belong to them. The age in which they attain access to the funds depends on the state, though:
ConclusionBoth a 529 plan and UTMA or UGMA account can set you on the right track for college saving. Saving money in a UGMA or UTMA account in addition to a 529 plan could help when it comes to paying for non-qualified expenses, such as application and testing fees, transportation costs during college, health insurance, medical bills and other miscellaneous expenses. If you’ve determined that a UGMA account is right for you, Acorns can help you open an account in under 3 minutes. Acorns Early is an investment account for children, where you can set up recurring investments (either daily, weekly, or monthly) starting as little as $5. For families with multiple children, you can add additional kids at no added cost. At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own. Give a gift to a child—and introduce investing skills early.Give a gift to a child—and introduce investing skills early.A custodial account can be an excellent way to make a financial gift to a child—whether your own, a relative's, or a friend's. This type of account, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), is set up by an adult for the benefit of a minor. Once the account is opened, it can provide an opportunity to teach some basic investing skills. You might talk about goals and discuss investment choices, review account statements, and discuss gains and losses. Frequently asked questions (FAQs) for custodial accountsReview these FAQs to determine if a custodial account is right for your particular circumstances. Frequently asked questions (FAQs) for custodial accountsNo. Money and assets deposited into a custodial account immediately and irrevocably become the property of the child. In other words, you can't take the assets back or give the assets to someone else. The custodian has sole responsibility to manage the assets for the minor until the custodianship ends. As a donor, you can designate yourself or another adult to be the custodian of the account. In some states a custodian can specify the age—18, 21, or even older—when the child will take control of the account (also called the "age of majority"). It is important to do this when you open the account, since you cannot make any changes later. Be sure to ask a Financial Consultant about the laws in your state. When the custodianship ends, the account holder (formerly a child, now legally an adult) will have complete control over the account, and the custodian's access to the account may be restricted. At the age of majority, the account holder may choose to sell any investments in the account or close the account and request a check for the proceeds. Alternatively, he or she may convert the account to his or her own name, establish the custodian as a joint account holder, or grant the custodian power of attorney on the account. Yes. With a custodial account, you can explain that the money belongs to the child and that you are investing it for him or her. By showing a child the investment mix, types of assets, and performance reports, you can educate him or her about investing. All custodial assets must be used "for the use and benefit of the minor." While this may be subject to interpretation, it's clear that custodians should never use the money for everyday living expenses. If the custodian is the child's parent or legal guardian, it's a good idea to get advice from a financial advisor regarding allowed distributions before making any withdrawal from the account for the benefit of the child. Probably not. You shouldn't transfer significant assets to a custodial account if you think the child may need to apply for financial aid. Assets held in a child's name, as in a custodial account, weigh more heavily against financial aid eligibility than do the parents' assets or assets held in a 529 account or an education savings account (ESA). In addition, a custodial account doesn't have the same tax advantages as a 529 or an ESA. Finally, 529s and ESAs offer parents more control, including the ability to change the account beneficiary. Custodial accounts are simpler to establish than trusts, which generally require more planning and the help of an attorney. However, a trust can offer more flexibility, control, and protection than a custodial account. For example, you can designate beneficiaries for a trust. Any investment income—such as dividends, interest, or earnings—generated by account assets is considered the child's income and taxed at the child's tax rate once the child reaches age 18. In 2022, if the child is younger than 18, the first $1,150 is untaxed and the next $1,150 is taxed at the child's rate. Anything over $2,300 is taxed at the parent's rate. In 2022, anyone can give a monetary gift of up to $16,000 (or $32,000 per couple splitting gifts) to each recipient without incurring federal gift tax. (This rule applies to custodial accounts as well as most other forms of gifts. You may accelerate up to five years' worth of the annual exclusion amount (5 x $16,000) to a 529 plan and reduce the value of your estate by contributing up to $80,000 ($160,000 for married couples filing jointly) per beneficiary. (This amount is subject to "add-back" in the event of the participant's death within five years and also assumes no other gifts are made to the same beneficiary during the same period). No. If you want to transfer a large sum of money to a minor (for example, tens of thousands of dollars), doing so as part of a comprehensive estate plan involving a trust is often the best choice. If a donor acting as the custodian dies before the account terminates, the account value will be included in the donor's estate for estate tax purposes. If a minor dies before the age of majority, a custodial account is considered part of the minor's estate and is distributed according to state law. As with any investment, it's possible to lose money by investing in a 529 plan. Additionally, by investing in a 529 plan outside your state, you may lose tax benefits offered by your own state's plan. Keep learning
Keep learningWhich statement is true about entering trades into a custodial account?Terms in this set (30) Which statement is TRUE about entering trades into a custodial account? The best answer is A. In a custodial account, only the custodian is permitted to trade.
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Which statement is true about a minor in a custodial account under UGMA reaching legal age?
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