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).
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 Aid
Compared 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 Limits
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 $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.
However, 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 State
Once 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:
|State||UGMA Account Age of Majority|
|Indiana, Puerto Rico, New York, Mississippi||21|
|All other states||18|
Both 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.
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