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Parents, grandparents and others often want to stash cash and other assets for the young people in their lives. Typical ways to accomplish this include savings accounts and education plans.
Two other options, although perhaps not as widely known, also can serve the same purpose: Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfer to Minors Act (UTMA) accounts. A UGMA or UTMA account is a custodial savings account you can set up for a minor to hold cash or other assets for their benefit.
What Are UGMA and UTMA Accounts?
In each state, a UGMA account allows cash and securities, such as stocks and bonds, to be transferred to a minor without the need to establish a formal trust fund in the minor's name. A UTMA account works the same way, except that it enables someone to transfer a broader array of assets to a minor, including cash, stocks, bonds, real estate, art, royalties and patents.
Generally, transfers into a UGMA or UTMA account cannot be revoked; the transferred assets belong to the minor whose name is on the account. However, the custodian of the account oversees it until the minor gets to a certain age. The age varies by state, but it's normally 18 or 21.
An adult who's a U.S. resident—including a parent, a grandparent, another relative or a friend—generally can set up a UGMA or UTMA account at a bank or brokerage firm. Typically, the minimum required to open this type of account is $500 to $2,000.
One benefit of a UGMA or UTMA is that the minor, once they've reached a certain age, can use the money and other assets for any purpose. That's in contrast to 529 savings plans and education savings accounts, which are supposed to be used for tuition and other education costs. Also, unlike a trust fund, establishing a UGMA or UTMA doesn't require legal know-how or help from a lawyer or legal service.
What Are the Contribution Limits for UGMA and UTMA Accounts?
No dollar limits are imposed on yearly contributions to UGMAs or UTMAs. However, as of 2022, any annual contributions above $16,000 for an individual or $32,000 for a married couple filing a joint tax return are subject to federal gift taxes.
Some, but not all, of the earnings in a minor's account might be tax-free. For someone under age 18 (or a full-time student under 24), the first $1,150 in earnings from a UGMA or UTMA is not taxed. The next $1,150 is taxed at the minor's tax rate, and any amount over $2,300 is taxed at the parent's tax rate. The minor's tax rate is usually lower than the parent's tax rate.
What Is the Age of Majority for UGMA and UTMA Accounts?
The age of majority for UGMA and UTMA accounts varies by state. As it relates to these accounts, age of majority refers to the age when a UGMA or UTMA must be transferred to the minor whose name is on the account. In each state, the age of majority for a UTMA typically supersedes the age of majority for a UGMA. States may have additional requirements, which is why some have a range of ages.
|State||UTMA Age of Majority|
|Alaska||21 to 25|
|Arkansas||18 to 21|
|California||18 to 25|
|District of Columbia||18 or 21|
|Florida||21 or 25|
|Louisiana||16 to 18|
|Maine||18 to 21|
|Maryland||18 or 21|
|Michigan||18 to 21|
|Missouri||18 to 21|
|Nevada||18 or 25|
|New Jersey||18 to 21|
|North Carolina||18 to 21|
|Ohio||21 to 25|
|Oklahoma||18 to 21|
|Oregon||21 to 25|
|Pennsylvania||21 to 25|
|Tennessee||21 to 25|
|Virginia||21 or 25|
|Washington||21 or 25|
|Wyoming||21 to 30|
What's the Difference Between UGMA and UTMA Accounts and a 529 Account?
While the purpose of setting up a UGMA/UTMA account or a traditional 529 savings plan may be the same, there are some key differences. Here are some of them.
|UGMA/UTMA Accounts vs. 529 Plans|
|UGMA/UTMA||529 Savings Plan|
|Tax-deferred growth||All contributions do not grow on a tax-deferred basis||All contributions grow on a tax-deferred basis|
|Use of contributions||Assets can be used for any purpose||Penalty for putting assets toward anything but education-related expenses|
|Control of account||Minor eventually gains control of assets||Minor does not gain control of assets|
|Investment options||Wide array of investment options||Narrow array of investment options|
|Financial aid||Assets may affect eligibility for financial aid||Assets do not affect eligibility for financial aid|
|Gift taxes||Low annual limit before gift tax is triggered||High annual limit before gift tax is triggered|
How a UGMA or UTMA Account Can Impact Financial Aid Eligibility
Because the assets in a UGMA or UTMA are considered the student's property, they can affect federal financial aid eligibility.
Under the federal formula for financial aid, a student typically must pitch in as much as 35% of their assets per year toward their college costs. This would include a UGMA or UTMA that's in the student's name. Meanwhile, a student's parents are supposed to pitch in far less per year—up to 5.6% of the parents' assets. As a result, the presence of a UGMA or UTMA account could take a significant slice out of a student's financial aid.
To avoid a financial aid dilemma, assets in a UGMA or UTMA can be transferred to a 529 plan before a student applies for college. This puts the assets under the parents' umbrella, meaning the student's odds of securing financial aid could be improved.
The Bottom Line
Before deciding on a UGMA or UTMA account, consider all of your options, such as a 529 savings plan or an education savings account. When choosing which one to pick, consider the implications when it comes to taxes, financial aid and spending flexibility.