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What Is a UGMA/UTMA Account?

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are custodial investment accounts designed to help parents, grandparents, or guardians save and invest for a minor. These accounts allow you to transfer assets , think cash, stocks, or even real estate , into an account that legally belongs to the child but is managed by an adult until the child reaches the age of majority (typically 18 to 25, depending on your state).Why are these accounts so popular? They’re a flexible, relatively simple alternative to trusts or 529 plans, offering unique advantages for families who want to give their kids a financial head start. But they’re not without drawbacks, and choosing between a UGMA account and a UTMA account requires understanding their nuances.

UGMA vs. UTMA: What’s the Difference?

UGMA Account: The Classic Choice

• What it is: A UGMA account, governed by the Uniform Gifts to Minors Act, allows you to gift financial assets like cash, stocks, bonds, or mutual funds to a minor.
• Availability: Available in all 50 U.S. states, making it a universal option.
• Age of majority: Typically, the child gains control at 18, though this varies by state.
• Limitations: Restricted to financial assets only—no physical assets like real estate or jewelry.

UTMA Account: The Flexible Upgrade

• What it is: A UTMA account, under the Uniform Transfers to Minors Act, expands on UGMA by allowing both financial and physical assets, such as real estate, fine art, or patents.
• Availability: Available in most states, except South Carolina and Vermont.
• Age of majority: Often extends to 21 or even 25, depending on state laws, giving assets more time to grow.
• Advantages: Greater flexibility in asset types, ideal for families with diverse investment portfolios.

Pro Tip: Check your state’s laws to confirm which account is available and when the child gains control. For example, in Connecticut, both accounts transfer at 21, while in Massachusetts, UGMA accounts transfer at 18 and UTMA at 21.

Why Choose UGMA or UTMA Accounts? Benefits That Pack a Punch

These custodial accounts are a powerful tool for parents who want to invest in their child’s future without the complexity of setting up a trust. Here’s why UGMA and UTMA accounts are worth considering:

No contribution limits: Unlike 529 plans, you can contribute as much as you want, though gifts above $18,000 per person ($36,000 for couples) in 2024 may trigger gift tax considerations.

Tax advantages: The first $1,300 of earnings in 2024 is tax-free, the next $1,300 is taxed at the child’s lower rate, and only earnings above $2,600 are taxed at the parent’s rate.

Flexibility: Funds can be used for any purpose benefiting the child—not just college—such as summer camps, extracurriculars, or even a future business venture.

Easy to set up: Open a UGMA or UTMA account through major U.S. banks or brokerages like E*TRADE or Fidelity with minimal fees and no minimum deposits.

Investment growth: With average market returns of 6-7%, these accounts can grow significantly over time, outpacing traditional savings accounts.

Image Idea: Include a chart comparing the growth of $10,000 in a UGMA/UTMA account at 6% annual return versus a standard savings account over 18 years.

The Catch: Drawbacks You Can’t Ignore

Before you rush to open a UGMA or UTMA account, consider these potential pitfalls:

Irrevocable contributions: Once you transfer assets, they belong to the child. No take-backs

Financial aid impact: These accounts are considered the child’s assets, reducing financial aid eligibility by 20% of the account’s value, compared to 5.64% for parent-owned 529 plans.

Loss of control: When the child reaches the age of majority, they can spend the funds however they choose—whether that’s college tuition or, yes, a flashy new car.

Taxable earnings: Unlike 529 plans, there’s no tax-free growth for education expenses, and earnings above $2,600 are taxed at the parent’s rate.

User Concern: If you’re worried about your child’s money management skills, a 529 plan or trust might offer more control. Consult a financial advisor to align your choice with your family’s goals.

UGMA/UTMA vs. 529 Plans: Which Is Better for You?

Many parents wonder how UGMA and UTMA accounts stack up against 529 college savings plans. Here’s a quick comparison to guide your decision:

How to Set Up a UGMA or UTMA Account: A Step-by-Step Guide