What Is a Custodial Account? UGMAs, UTMAs and More - NerdWallet (2024)

FAQs

What is the difference between a custodial UGMA and a custodial UTMA? ›

A UGMA account is limited to purely financial products such as cash, stocks, mutual funds, bonds, other securitized instruments and insurance policies. A UTMA account, on the other hand, can hold any form of property, including real property and real estate.

There are two main types of custodial accounts: the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). The largest difference between the UGMA and UTMA is that the UTMA covers more assets. For instance, with a UGMA account, you can include assets such as stock, bonds, and mutual funds.

Cons. Greater impact on financial aid. Because they're held in the name of the child, UTMA/UGMA accounts hurt financial aid eligibility more than comparable 529 plans. Money becomes the child's at majority.

Typically, transfers made to a UGMA or UTMA account are irrevocable and belong to the child in whose name the account is registered; however, the account is controlled by the custodian until the child reaches a certain age, which varies by state (usually 18 or 21).

No, a parent cannot take money out of a UTMA account. The assets remain under the control of the custodian until the minor reaches the majority age.

As a custodian, you can take as much money as you think is reasonable for your child's “use and benefit” from their UGMA. But just because your child gets some benefit from a purchase doesn't make it a justifiable expense. Expenses that likely won't fall under proper use of your child's account include: Food.

A custodial account is generally created by a parent or grandparent for the benefit of a minor child or grandchild. When you put money into a custodial account, you make a gift to the minor beneficiary of the account, even though the minor does not control the account.

The drawbacks: You can't change the beneficiary of a custodial account once it's established. Your child can use the money however they want after reaching a certain age, and investment income in custodial accounts may trigger the kiddie tax. The account can impact financial aid eligibility.

The IRS considers the minor child the owner of the account, so the earnings are taxed at the child's tax rate up to a certain point. Every child under 19 years old—24 for full-time students—who files as part of their parent's tax return is allowed a certain amount of "unearned income" at a reduced tax rate.

UTMA accounts allow a wider range of assets, including physical property like real estate, while UGMA accounts only allow cash and financial investments. UTMA and UGMA accounts offer investment flexibility, no income or contribution limits, and potential tax savings.

Do parents pay taxes on UTMA accounts? ›

Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child's—usually lower—tax rate, rather than the parent's rate. For some families, this savings can be significant. Up to $1,050 in earnings tax-free. The next $1,050 is taxable at the child's tax rate.

Bottom line. A custodial account is a great way to give minors cash, securities and other investments. That said, keep in mind the tax and financial aid implications and the fact that withdrawals must be used for the benefit of the minor.

The minor or beneficiary is considered the owner of all assets in a UGMA account and the income they generate for tax purposes. But the earnings can be taxed either to the child or the parent.

The age of majority for an UTMA is different in each state. In most states, the age of majority is 21 — which means that when a child turns 21, the custodianship of assets will end. But in other states, the age of majority is either 18 or 25. The custodian can also sometimes choose between a selection of ages.

Can I use the account to buy a car for my child? Or to send the child to private school? Yes, you are allowed to use UTMA accounts for items included in a support obligation, regardless of what you read elsewhere. Does the minor have an absolute right to the money?

UGMA and UTMA are custodial accounts that allow you to hold assets for minors until they come of age. UGMA accounts hold cash, stocks, and bonds, while UTMA accounts hold cash, stocks, bonds, and physical assets such as real estate.

Custodial accounts, also known as UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) accounts, were created under state laws to hold gifts or transfers of funds to a minor.

The UTMA or UGMA account helps a minor save and invest while providing flexibility. Perhaps your child is better suited for an apprenticeship or is being groomed to take over the family business. Or, you may want your child to take out a loan and be responsible for covering the cost of their own educational expenses.