UTMA and UGMA accounts are types of custodial accounts that allow you to save and transfer financial assets to a minor child without establishing a trust. UTMA stands for Uniform Transfers to Minors Act, and UGMA stands for Uniform Gifts to Minors Act.
They are opened and held through a bank or brokerage account and may contain cash, mutual funds, stocks, and bonds. UTMA accounts can also contain real estate and other tangible assets. The parent or another relative maintains control of the account in the name of the minor until the child reaches adulthood (the age of majority in your state).
Knowing the acronyms is great, but it’s essential 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, a 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 financial aid eligibility by 20% of the asset value.
Since parents usually report 529 plans as an asset, they reduce aid by up to 5.64% of the asset value. Use our Financial Aid Calculator to estimate your financial need based on student and parent income and assets, family size, 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 a 529 plan offers.
You make contributions with after-tax dollars. According to IRS rules, you can contribute up to $18,000 annually without incurring a gift tax ($36,000 per married couple). The first $1,250 of a child’s unearned income is tax-free. The IRS taxes the next $1,250 at the child’s tax rate, also called the “kiddie tax.” Anything over that is subject to income tax at the parent’s tax rate.
Compare this to 529 plans, which offer tax advantages: earnings grow tax-deferred and can be tax-free if they meet certain withdrawal conditions. This trust fund calculator determines a trust fund’s net present value (NPV) to help you value the trust fund for reporting it as an asset on the FAFSA.
Flexible Spending
However, UGMA and UTMA accounts provide more flexibility in how the funds can be used compared to a 529 plan. To avoid a penalty, you’ll need to use the funds in a 529 plan for specific educational expenses, including tuition, books, supplies, and a computer. You can use funds in a UGMA/UTMA account 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 school clothes and summer programs.
UGMA Age of Majority by State
Once your child reaches adulthood, the UGMA funds belong to them. The age at which they attain access to the funds depends on the state, though:
State |
UGMA Account Age of Majority |
Alabama, Nebraska |
19 |
Indiana, Puerto Rico, New York, Mississippi |
21 |
All other states |
18 |
Conclusion
Both a 529 plan and a UTMA or UGMA account can set you on the right track for college savings. Saving money in a UGMA or UTMA account in addition to a 529 plan could help pay for non-qualified expenses, such as application and testing fees, transportation costs during college, health insurance, medical bills, and other miscellaneous expenses.
