Acorns Early: Review and How Acorns Early Works

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By Nick Mann

June 3, 2021

Acorns Early is a simple way to invest in a child’s future. It’s an UTMA/UGMA account that lets parents, guardians or family members create a custodial account for a child right in the app. This Acorns Early review will help you decide if this type of account is right for your child.

Unlike a 529 college savings plan where the funds can only be used for education, the money saved with Acorns Early can go toward anything that benefits the child.  

What is a UTMA/UGMA Account?

UGMA and UTMA accounts are custodial accounts under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act. A custodian, typically a parent or other relative, sets up the account in the child’s name. The custodian controls the account until the child reaches the age of majority in their state.

UGMA and UTMA accounts allow parents to save money and invest and maintain full control until their child is an adult. Both accounts allow you to transfer financial assets to a minor without establishing a trust. 

UTMA/UGMA account have a less favorable financial aid impact than 529 plans. 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. 

UTMA 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 $15,000 annually without incurring a gift tax ($30,000 per married couple). The first $1,100 of a child’s unearned income is tax-free. The next $1,100 is taxed at the child’s rate. Anything over that is taxed as the parent’s income. 

But compared to a 529 plan, UGMA and UTMA accounts provide more flexibility in how the funds can be used. To avoid a penalty with 529 plans, money needs to be used for specific educational expenses, including tuition, books, supplies and a computer. The funds in an UGMA/UTMA account can be used for anything – a car, travel, or other college-related expenses not consider a qualified expense, such as application fees or health insurance.

While a child is a minor, funds can be used to pay for expenses that benefit the child, such as clothes for school and summer programs.

How Does Acorns Early Work?

First, you create an account on Acorns Early, which can be done in under five minutes. You can set up daily, weekly, or monthly recurring investments to make payments convenient and hassle-free. 

The money is invested in a mix of exchange-traded funds (ETFs), which Acorns selects based on your financial goals. The funds in the account become available to the child at their “age of transfer,” which is when they’re legally considered an adult based on their location, usually 18 or 21.

Here are some important Acorns Early features to review:

  • The option to add multiple children at no additional cost
  • Automated Recurring Investments
  • Exclusive family-friendly bonus investments
  • Access to family financial advice via articles and videos from experts
  • Potential tax savings
  • Flexibility managing the money

Besides that, you also have access to Acorns’ full financial wellness system that comes along with built-in investment, retirement, and checking accounts. 

Pros of Acorns Early

During our review, we uncovered many advantages of Acorns Early. Perhaps the biggest benefit is that there are no restrictions when it comes to qualified expenses. Money saved in a 529 plan can only be spent on qualified educational expenses, such as tuition, fees, books, school supplies, and so on. However, the money saved in Acorns Early can be spent on college, to purchase a vehicle, or anything else the child needs once they become an adult. It’s very flexible. 

For parents that have decided a 529 college savings plan is the primary way they want to save for college, a UGMA/UTMA account can be a good compliment since these accounts can pay for non-qualified expenses. These can include a car, travel expenses, college application fees, and other costs considered a non-qualified expense in a 529 account.

There’s also the potential to save a significant amount of money. For example, if you invest just $5 a day for a child from birth, considering a 7% average market return, that Early account could have more than $60,000 by the time the child is 18 years old.

And the access to expert financial advice is a nice touch, especially if you don’t know much about investing but you want to quickly grow your knowledge.  

Acorns also has a unique “Earn” feature that allows users to earn more money for their account by shopping, job searching and inviting friends. The referral program offers $5 for the user and $5 for each friend who signs up, with potential for an additional monthly bonus. Shopping bonuses are available through over 350 popular brands.

Investors who are looking for sustainable investment options can select an Acorns Sustainable Portfolio for their account. The portfolios consist of iShares environmental, social and governance (ESG) ETFs. These ETFs are designed to provide exposure to companies with positive MSCI global ESG ratings, while performing on par with a traditional Acorns investment portfolio.

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Cons of Acorns Early

Our review also reveled some disadvantages to using Acorns Early. As with any UGMA account, when it comes time to fill out the FAFSA (Free Application for Federal Student Aid), the money in this account is reported as a child’s asset. This reduces aid eligibility by 20% of the asset value. This means less opportunity for free money known as grants, the chance to participate in work-study programs, or for federal student loans, which have much more favorable benefits than private student loans. On the other hand, 529 plans, whether owned by the parent or child, are treated as a parent asset and reduce aid eligibility only up to 5.64% of the asset value.

UGMA accounts don’t offer the same tax benefits as 529 plans do.

While Acorns Early fees are quite small for larger accounts, they can be hefty if you only have a small balance. Say for example, your account balance is only $100. With a $5 a month fee, this would come out to $60 a year and eat up 60% of your account balance. Once you get to $5,000, Acorns’ fees would only account for 1.2% of your account balance. But during the earlier stages, the fees can be substantial in comparison to how much you’ve saved. 

Acorns will also hit you with account fees if you ever decide to transfer your money from Acorns Early to another brokerage account. Acorns charges $50 per ETF to process asset transfer requests. However, you may withdraw funds at no cost if you deposit them back into your checking account.

The other issue we found during our Acorns Early review is that the robo-advisor portfolio only offers six asset classes, which is relatively small. Although this is certainly enough to be considered a diversified portfolio, there are similar types of UTMA/UGMA accounts that offer more options.

Who Acorns Early is Best For

It’s ideal for people who: 

  • Want a “spare change” account to invest in the future of a child and don’t want the limitations of a 529 plan and don’t mind losing out on the tax and financial aid benefits of a 529 plan
  • Prefer to schedule automated recurring investments
  • Would like to learn more about investing along the way

Acorns Early Review: Bottom Line

Acorns Early is an UTMA/UGMA account that allows parents, guardians, or family members to invest money into a child’s account that becomes available once they reach adulthood. This Acorns Early review explains how it is quick and easy to set up and is a great way to dip your toes in the water of investing. Sign up here.

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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.

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