UTMA vs UGMA: Understanding Custodial Accounts

There are a lot of ways to plan for the financial future of your children, specifically when it comes to investing for college. In fact, it has been estimated that college could cost upwards of $100,000 per year by 2030. 

If that’s the case, future planning involves looking at options beyond a traditional savings account. For instance, custodial accounts are a more aggressive method of saving that can make it possible to set your child up for a solid financial future. 

Let’s take a look at UTMA vs UGMA accounts to help you decide which option is a more aggressive method of saving.

What is UTMA?

The Uniform Transfers to Minors Act (UTMA) is a law that controls the transfer of assets from adults to minors. Usually, when money is transferred from one individual to another, there are various taxes that come into play, and the taxes depend on the amount being transferred. 

A UTMA account is a tax-advantaged way for parents or other adults to pass taxable gifts on to minors. Thanks to UTMA, a minor can own securities, properties, royalties, patents, and real estate via a custodial account that is managed by an adult on their behalf.  

Adults can even appoint a third party to manage the account, though typically, it will be managed by the parents or guardians until the child is of age. The rules of UTMA accounts, specifically the age that the minor can take control of the account, will depend on your state, not on your trust document. So, it is important to stay updated on that information. 

UTMA accounts are appealing because they allow you to plan for financial responsibilities in the future, like your child’s college fund or their ability to purchase a home when they are older. It is important to know that anyone can gift money to children via a UTMA account, but the funds are irrevocable, meaning you cannot take them back once they are gifted. 

What is UGMA?

The Uniform Gifts to Minors Act (UGMA) was established in 1956. Similar to a UTMA, UGMA accounts allow for the transfer of financial assets without requiring a trust account.

Essentially, a UGMA account is a custodial account that is controlled by a donor, who is usually the parent. The donor will have control of the account until the child is of age and can take it over themselves. While this age varies by state, the donor, or the custodian, will manage the funds on behalf of the child, known as the beneficiary. 

This means the adult will make decisions that can potentially impact how well the UGMA account thrives over time. The custodian can decide when to buy stocks, when to sell them, and which other assets are best to invest in, knowing that it benefits the beneficiary. 

It is important to remember that the donor does not have to be the custodian. The donor can set up the UGMA account and then transfer the role of the custodian to another family member or a financial institution. Custodians have a lot of power over the UGMA account, so it is important to enter into the role with a full understanding of the responsibilities.

Similar to a UTMA account, others can transfer funds to a UGMA account, but their contributions cannot be taken back. UGMAs are typically used for the purpose of saving funds to put towards college. However, there is some appeal to a UGMA account over a 529 plan. 

A 529 plan is also used to invest in college, but it is not as flexible as a UGMA account. A 529 plan is a tax-advantaged plan, also known as a qualified tuition plan. The fee associated with a 529 plan depends on the specifics of the plan, as there is a prepaid tuition plan as well as an education savings plan, and tax benefits vary by state. 

Even so, 529 plans work similarly to UTMA and UGMA accounts. However, with a 529 plan, the funds can only be put towards qualified educational expenses, like college tuition, books, room, and board, or other education-related expenses. There are benefits to a 529 plan, but the applications of the funds are far more limited than UTMA and UGMA accounts.  

Are custodial accounts only for college?

UTMA and UGMA accounts qualify as custodial accounts, and they do not only have to be used for college-related expenses. However, most custodial accounts are typically used for educational expenses. 

Custodial accounts are essentially savings accounts that are managed by a custodian, who must be an adult, until the beneficiary, who starts out as a minor, reaches an age where they are legally allowed to manage or use the funds on their own. You can even put the money from a custodial account towards a 529 plan, which is specifically for college. 

Though the funds from a UTMA and a UGMA account can be used for college, be mindful of the fact that no matter what the funds are put towards, these accounts can interfere with the child’s ability to apply for financial aid. Once the account is transferred to the beneficiary, the funds in the account will be considered their assets, which can account for 20% of their income. 

Let’s say they planned on using those funds to purchase a home after finishing school. Since the balance of both UTMA and UGMA accounts is regarded as income, financial aid providers will assume that at least 20% of those funds can be put towards their college expenses. 

UTMA vs UGMA comparison

Some people use UTMA and UGMA interchangeably. While they are very similar, there are also many differences. Let’s compare and contrast the key account features of both UTMA and UGMA accounts! 

Taxes 

Anything exceeding $2,200 in either a UTMA or a UGMA is taxed at the parents’ tax rates as opposed to the children’s rate, the latter of which is lower. Child tax rates apply to children younger than 18 or dependents younger than 23. 

The first $1,100 is tax-free, and then the next $1,100 is taxed at the child’s tax rate. Taxes are one of the key discussion points for both UGMA and UTMA accounts. UGMA contributions are made after taxes have been deducted, so there is no tax deduction for your contribution. 

However, in the past two years, individuals can gift up to $15,000 tax-free to UGMA accounts, while married couples can gift upwards of $30,000 without being taxed on their gifts. This is usually only offered for contributions to UTMA accounts. 

Not allowed everywhere 

Though these accounts are similar, they are not both offered in all states. You can open a UGMA account in every state, but the same is not true of a UTMA account. Neither Vermont nor South Carolina permits UTMA accounts. 

UTMA accounts are considered to be a more modern form of custodial accounts. Even though you can open either UTMA or UGMA accounts, it might be worthwhile to consider the freedoms associated with a UTMA account in favor of a UGMA account. 

Asset options 

Considering that the UGMA account is considered to be the more outdated option, it makes sense that there are some limitations on UGMA accounts in regard to the assets they can include. A UGMA account is limited to more traditional investment options such as stocks, bonds, and mutual funds. 

UTMA accounts allow for the aforementioned and more. For example, the property can be included in a UTMA account. Keep in mind that assets are included in the custodian’s taxes until the beneficiary takes over the account. 

Is there a difference between UTMA and UGMA?

As mentioned, there are a few differences between UTMA and UGMA accounts. Here is a more condensed list of the differences. 

	UTMA	UGMA
Maturity date	Up to 25 years old	Up to 18 years old
Contribution limits	None	None
Financial aid impact	Counted towards beneficiary’s income	Counted towards beneficiary’s income
Asset transfers	Any	Cash and securities
Gift tax limit	$15,000 single and $30,000 married	$15,000 single and $30,000 married
Termination date	Up to 25 years old	Up to 18 years old

5 ways to save for your child’s future 

1. Investment accounts 

Investing is a great way to save for your child’s future. MoneyLion understands that investing can be confusing at times, and that’s why we’re here to help. With the auto-invest feature, you can reach your goals even faster without worrying about management fees or minimums. 

Simply pick an amount equal to or greater than $5 and set that value as the amount you’d like to auto-transfer at your desired frequency. From there, your selected amount of money will be invested into a fully managed investment account with MoneyLion. 

You’ll get to decide the risks you want to take by choosing from five core portfolios. All of the options offer ETF diversification, making it possible for your money to grow with little effort on your end. 

2. Roth IRAs 

A Roth IRA is a retirement account that offers conditional tax-free withdrawals. The amount you can contribute varies on a yearly basis. They offer numerous options for investments, like mutual funds, ETFs, stocks, and bonds. 

It is important to note that contributions can only be made with earned income in the form of cash or checks, but contributions can be made at any age. Roth IRAs are fairly easy to open as they are offered by banks and brokerage companies alike. 

3. Savings bonds

Savings bonds are a classic form of saving up for your future. Series EE and Series I savings bonds are tax-free as long as they are used for higher education expenses. You must be at least 24 years old to purchase a savings bond, and parents can purchase the bonds for their children. 

You can transfer the bonds to a 529 plan as well. Bonds are a safe, low-risk way of increasing your return on investment for college expenses. Consider gifting them to your child occasionally as another method of future planning. 

4. Savings accounts 

Savings accounts are one of the most popular methods of saving as they are a great way to save for your child’s future. MoneyLion makes it easy to access all your funds in the app. 

Using a MoneyLion account, set up direct deposits in your safety net account. You can put a set amount aside on a regular basis to build up your financial safety net with access to other financial tools like Instacash and Round Ups. Savings accounts are also great because others can contribute funds as gifts that can be deposited into the account. 

Your child could even decide to contribute to their savings account when they get older by depositing their extra money into the account. Savings accounts come with no risks, and that can provide a lot of peace of mind about their future. However, keep in mind the fact that there are also minimal returns on savings accounts. 

5. Coverdell ESAs

A Coverdell Education Savings Account (ESA) is a tax-deferred savings account that helps you fund educational expenses on your child’s behalf. The funds can be used for various educational expenses, and they’re not just for college-aged children. 

The Coverdell ESA must be opened before the child turns eighteen years old, but there are some exceptions. The funds must also be used before the beneficiary turns thirty in order to avoid resulting in exorbitant fees. There are income requirements associated with a Coverdell ESA as well.  

Pick the best option for you

There are a lot of ways to go about investing in your child’s future. From UTMA accounts and UGMAs to investments and savings accounts, there is an option out there for everyone. 

Custodial accounts can help alleviate some of the financial stress that college can cause while also giving children the opportunity to start saving for their futures early on in life. Be mindful of the taxes and the contribution limits involved in these options.  

If you want to build a financial future for your child, you can start taking small steps toward your goal. Try starting with depositing small amounts of money into your MoneyLion account or sign up for direct deposits through the Safety Net feature. 

Every little bit counts. If you aren’t able to save years in advance, there are still ways to invest even as a college student to help fund your college career and plan your financial future!

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