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UGMA vs UTMA Accounts: Which Is Right for Your Child’s Future
Custodial accounts may help you secure your child’s future.
As a parent, you may face challenges preparing your child for the future, especially regarding money. Opening a savings account on your child’s behalf may be a good start, but there are also other options that could help maximize savings and set your child on a path to financial success.
UGMA and UTMA accounts, so named for the Uniform Gifts to Minors Act and Uniform Transfers to Minors Act that created them, are custodial accounts that parents and guardians open in their children’s names to help financially prepare them for the future. Let’s explore how these accounts work.
This information is not tax or investment advice. You should consult with a tax advisor and/or a qualified investment professional for advice specific to your particular circumstances.
Key Takeaways
UGMA and UTMA accounts help you build savings for your child that they receive when they reach the age of majority.
UGMA accounts are available in all 50 states. UTMA accounts are available in all states except Vermont and South Carolina.
UGMA accounts let you contribute cash and securities while UTMA accounts let you contribute multiple asset types, making them more versatile.
What Are UGMA and UTMA Accounts?
The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) regulate the transfer of cash, property, and assets to minors.1
Parents or guardians open these custodial accounts to help build savings for a minor’s future and transfer assets without needing a trust. Trusts may be time-consuming to create and, depending on your situation, expensive.2 It’s important to note that, once assets are in an UGMA or UTMA account, they can’t be revoked.3
A custodian, typically a parent or guardian, manages the account until the minor reaches the age of majority, which varies by state, but is often between 18 and 25.4 At that point, the assets become the child’s and they’re free to use them.
Be aware that Vermont and South Carolina have not adopted the Uniform Transfers to Minors Act, meaning residents in these states are only able to open UGMA accounts.5
Key Differences Between UGMA and UTMA Accounts
Though both account types help set money aside for a child’s future, they work in slightly different ways. Here are a few key differences you need to know about before you open an account on your child’s behalf.
If you’re unsure which account would work best for your situation, consult a professional financial or tax advisor.
Asset Types
One of the primary differences between the accounts is the asset types you can transfer into them. UGMA accounts only allow for the transfer of financial products, including:6
Cash
Mutual funds
Stocks
Bonds
Annuities
UTMA accounts, on the other hand, are a bit more flexible. In addition to transferring financial products, you may also transfer:7
Real Estate
Paintings
Royalties
Patents
The versatility of UTMA accounts may make it easier to transfer assets that your child otherwise may not have easy access to.
Account Availability
Where you live may impact which account type you’re able to open. UGMA accounts are available nationwide, so you’re able to open and contribute to the account regardless of where you and your child live.
Termination Date
Once your child reaches a certain age, the money and assets in both UGMA and UTMA accounts becomes theirs. At that time, the parent or guardian’s oversight of the account terminates. The age when this occurs depends on the account you choose and where you live.8
UGMAs typically transfer to the child at age 18,9 while UTMA accounts may extend up to age 25 or beyond.10 However, the termination date for both account types varies by state, so it’s important to research when your oversight of the account ends based on your location.
Is a Custodial Account Right for Me?
UGMA and UTMA accounts may make it easier for parents, grandparents, and guardians to transfer assets to minors and give them flexibility with the funds once they become adults.
When deciding what type of account to open to help save for your child’s future you have a few considerations to keep in mind.
How much control do you want? If you’re worried about your child’s money management skills, a 529 plan or another college savings account may be a better fit. If this isn’t a concern, an UGMA or UTMA account may work well.
What assets are you trying to transfer? If you have assets beyond cash that you want to transfer, such as stocks, bonds, and property, and UGMA or UTMA account may be a good choice.
Could you need these funds? If you think you might require access to the funds for your own needs, these accounts may not be the right choice for you, as the transfers are not revokable. A savings account for your child’s needs, but still in your name, may be a better option.
If you have questions about your specific situation, consult a financial advisor who can help you review your goals and outline a plan.
Final Thoughts
UGMA and UTMA accounts offer ways to save for your child’s future while giving them the flexibility to use the funds for education or other expenses when they become adults.
While these accounts offer a unique opportunity to help set your child up for future success, it’s important to help your child understand the responsibilities associated with these funds once they become adults. Take time to discuss finances with them to help prepare them for the responsibility.
While you consider your options, don’t delay your savings journey. Start by opening a high-yield savings account today!