What is an UGMA or UTMA account?

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By Kristen Kuchar

July 22, 2020

UGMA and UTMA accounts are both custodial accounts, held in the name of the minor, but controlled by a parent or other relative until the child reaches the age of majority in your state.

UGMA and UTMA accounts allow parents to save money and invest, maintain full control until their child is an adult. UTMA stands for Uniform Transfers to Minors Act, and UGMA stands for Universal Gifts to Minors Act. Both accounts allow you to transfer financial assets to a minor without establishing a trust. 

Impact on Financial Aid 

Compared to 529 college savings plans, UTMA/UGMA account have 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.

Custodial Accounts and Taxes

UTMA and UGMA accounts do not have the tax benefits that a 529 plan offers

Contributions are made with after-tax dollars. A person 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. 

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.

Flexible Spending

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 UGMA or UTMA account to pay for expenses that benefit the child, such as clothes for school and summer programs.

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. 

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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