UTMA vs UGMA

The Uniform Transfers to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) are unique taxable custodial accounts that help you save for your kids. While you can save and control these accounts, only your child can use or benefit from them. They can be helpful saving vehicles for your kids as they grow up. The minor can only access the funds until they are of age, usually 18 or 21. Although these accounts seem similar in operation and intent, they contain differences that are vital to note. Read on to learn more. 

How Do These Accounts Compare?

UGMA is a gift: UGMA provides a way to gift your child with money and financial securities such as bonds. 

UTMA is transferred to the child: With a UTMA account, you can transfer money and other gifts such as real estate without the need of a trustee. 

UGMAs accept basic assets: UGMAs accept money, insurance policies and financial securities, including bonds, mutual funds and stocks.  

UTMAs are more complex: UTMAs have rules regarding how you spend the funds and how they are taxed.

The main difference lies in types of assets that can be held: A UGMA account is limited to financial products like cash, stocks, mutual funds and bonds whereas a UTMA account holds financial products and any form of property, including real property and real estate.

What is a UTMA Account?

A UTMA is a custodial account under the UTMA Act that allows custodians to give beneficiaries gifts. This flexible account lets families invest for their family members. UTMA is an extension to UGMA and allows you to transfer gifts (including those under UGMA) to the beneficiary. For instance, if you’re an asset manager, you can put your car or any other asset in this account for your child. 

Gifts may include cash, exchange-traded funds (ETFs), life insurance policies, personal belongings, fine art and real estate properties. 

The donor to the account, another adult or a financial institution can be the custodian of the UTMA account. The custodian manages the UTMA account and any investment assets until the beneficiary is between 18 to 21, depending on state rules. In some states, you can extend your control for a couple of years, delaying the age at which your kids can receive the assets. 

Under the UTMA Act, you’re allowed to use or invest the money in the UTMA account provided it's for your child’s benefit. The expenses could vary from education to extracurricular activities to transportation for your child. If you’re saving for your child’s college with the UTMA account, you can not control how they use the money once they’re of age. Further, if your child applies for federal financial aid, the funds in the UTMA account count as assets that could reduce eligibility for need-based loans or scholarships. 

A UTMA custodial account has a few tax implications.The account is funded with after-tax dollars, so there’s no tax imposed on the withdrawals. However, the unearned income is taxed. Unearned income includes dividends, capital gains and taxable interest from the funds in the account. Under the 2017 Tax Cuts and Jobs Acts, the first $1,050 of the unearned income is tax-exempt while the next $1,050 is taxed at a 10% rate. The beneficiary’s unearned income of over $2,100 is taxed at the same rate as in  trusts – often referred to as the “kiddie tax.”  

Additionally, you should report gifts over $16,000 in 2022 to the federal government including any gifts to your child’s UTMA account. Amounts over that amount need to be reported to the IRS on Form 709, the Gift (and Generation-Skipping Transfer) Tax Form, but it’s unlikely you would owe any tax on the gift. As the IRS explains, the applicable exclusion amount for owing tax consists of a basic exclusion amount of $11,700,000 in 2021 and, in the case of a surviving spouse, any unused exclusion amount of the last deceased spouse. So you aren’t taxed on gifts until you’ve given away more than $11,700,000 in your lifetime or $23,400,000 for you and your spouse.

What is a UGMA Account?

A UGMA is a brokerage account that permits a custodian to gift money and financial securities to minors. Whether a parent, another adult or a financial advisor or institution can open and fund a UGMA account as the custodian. You can open a UGMA account at a brokerage bank or institution. 

Just like in the UTMA, as the custodian of the UGMA account, you control the account until your child reaches your state’s considered adult age. While a UGMA account can hold stocks and bonds, it can’t hold high-risk financial assets such as stock options. 

One of the key features of the UTMA account is that anyone can contribute to a UGMA account without limit. However, contributors can’t take their gifts back. The beneficiaries do not automatically gain control of the account – they own all the assets in it. Once they’re of age, they can withdraw the assets according to their discretion. Mostly, you can only withdraw the gifts specifically for your child’s use and benefit, exclusive of the costs accompanied by raising kids. 

A UGMA account is taxed according to state and federal tax rules based on “kiddie tax” rules described above. Additionally, if you give more than $16,000 in 2022, you’d submit – but probably not pay any tax with – a Form 709.

Benefits of Custodial Accounts

Saving for the future: You can use custodial accounts for children as a head start to secure a better financial future for your children. Saving for your kids when they’re born gives you more time to accumulate assets. Additionally, you’ll have a compound interest advantage and other potential market gains since the investments will have more time to grow. The main idea is that the longer the investment sits in the account, the more time it’ll have to grow. 

Saving for college: Saving and investing for your child’s college expenses can be overwhelming. Custodial investment accounts’ savings for higher education can help. However, you may want to research the potential impact on student financial aid from UTMA and UGMA accounts.

Setting up a child’s nest egg: These accounts are flexible and have no limit on maximum contributions. The combination of cash, mutual funds and stocks is a long-term financial goal that you can even use for your child’s retirement through an IRA account.  

Preparing for sudden emergencies: You can use this savings vehicle to assist your child on a rainy day. In the event of loss of income, your child can use the money in these accounts to cover expenses. 

Compare UTMA and UGMA

Benzinga offers parents and other custodians insights and reviews of UTMA and UGMA custodial accounts. That way, it’s easier to make the best decision based on your risk tolerance and time. Also, you can teach your children the benefits of investing. 

Frequently Asked Questions