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UTMA Account – Everything You Need To Know About These Custodial Accounts

What is a UTMA account? 

UTMA stands for Uniform Transfer to Minors Act. A UTMA account is an account that allows you to give a minor or child money, property, or anything of financial value such as artwork, life insurance policies, royalties, and even patents.

Why not just give your child the money directly?

Firstly, anyone who has taken their child to the Walmart toy aisle knows that children are not the greatest money managers. Children usually don’t spend money with an eye toward the future. Therefore, we have financial instruments such as the UTMA account to ensure your child’s money is well managed. UTMAs allow someone other than your child to manage the money or investments in the account until your child reaches the age of majority. The manager can be you, a relative, a financial advisor, or anyone you appoint. 

Additionally, the UTMA account allows you to earmark some money specifically for your child. If you were to pass away, all of your assets would normally go to your estate. Without an UTMA account or another custodial account set up, the assets you set aside for your child would be mixed up with all your other assets, and would incur more fees and possibly taxes. 

What are the income tax implications and benefits of an UTMA account?

The UTMA account has some tax benefits, but you are not going to be saving thousands of dollars on taxes every year by opening an account for your child.  

Here is what you need to know, based on 2021 tax laws:

  • The first $1,100 in earnings in the UTMA account are tax-free. This earnings figure includes dividends, interest income, and any capital gains. 
  • The next $1,100 in earnings is taxable at the child’s tax rate. Because your child probably doesn’t earn much income, their tax rate is typically 10%. 
  • Any earnings over $2,200 are taxed at your highest marginal tax rate. For example, if you file jointly with a spouse and make $100,000 combined, you will pay 22% tax on this income.

These rules are called the “kiddie tax” rules. They give you some flexibility but ensure no one is skirting around tax laws by putting assets in their children’s names. 

As discussed, because of these rules, you won’t be saving thousands of dollars on your tax bill by opening a UTMA account. However, every little bit (or every Pasito) helps.

Are there any other tax implications to consider?

Unlike contributions to Traditional IRAs or Health Savings Accounts, the person making the gift will not receive any tax benefits other than a lower tax bill.

There are gift tax implications to consider when gifting your child assets above $15,000 per year. For most people, gifting more than $15,000 in cash or assets will involve filing more paperwork with the IRS at the end of the year. If you have exhausted your lifetime gifting limit (which is hard to do unless you have a lot of money) you will be subject to a gift tax of 37% on the annual gift over $15,000. 

Image of a mother opening an UTMA account for her child

When can my child access the assets in the account?

Each state sets its own rules for the age a child may access the assets. This is called the “age of majority” and it can be anywhere from 18 to 25 years old. You should review your state’s UTMA age of majority before opening a UTMA account.

The “age of majority” does not limit your ability to use the assets in the account for your child’s benefit. You can spend money from the UTMA account as long as you can prove that your child experienced a material benefit from the expense.  

For example, you can spend the funds on K-12 private schools for your child. However, you can’t spend the cash in a UTMA account on clothes, mortgage or rent payments, food, or any other item that you would normally provide as a parent. You should review hypothetical and actual cases of parents getting in trouble for spending their child’s UTMA money before making the decision to open a UTMA account. 

Once I contribute to a UTMA account, can I get the assets back?

No. Once you transfer the asset to your child, there is no turning back. Make sure you truly don’t need them before you make the transfer.

What is the difference between a trust fund and a UTMA account?

There are three main types of accounts used for giving money or assets to minors. Below is a high-level overview of each:  

  • UTMA Account
    • As explained above, this is a financial account that allows you to gift assets to your child or grandchild. The child can manage the assets once they reach a certain age.
  • UGMA Account 
    • The UGMA account is very similar to a UTMA account except you can only invest in checking and savings accounts, CDs, mutual funds, stocks, bonds, and insurance policies. No real estate is allowed.
  • Trust Fund 
    • A trust fund is like a UTMA account but can be used in many more ways. People use trust funds to gift businesses to beneficiaries, give to multiple beneficiaries, and better control when the children can access funds directly.
    • That extra flexibility comes at an additional cost. The cost to set up a trust fund can range from $120 to a few thousand dollars, whereas a UTMA account can be free to open.

What’s the difference between a 529 plan and a UTMA account?

UTMA accounts and 529 plans are somewhat similar but are different in a few important ways, especially when it comes to applying for financial aid.

UTMA Account529 Savings Plan
Use of fundsFunds can be used for anything that benefits the childFunds can only be used for educational expenses
Type of assets allowedCan invest in non-financial assets (real estate, artwork, etc.)Only can invest in financial assets (cash, stocks, bonds, etc.)
Income tax implicationsEarnings on investments are taxableWhen used for educational purposes, earnings are tax-free at the federal level
Tax penaltiesNo 10% IRS penalty on non-educational expenses10% IRS penalty if the expenses are not used for educational purposes
Tax deductibility of contributionsContributions are not tax-deductible (but may lower tax bill for parents)Some states give deductions or credits for 529 contributions
Financial aid implicationHas a major negative impact on FAFSA expected contribution because the UTMA account is considered a child asset529’s are usually considered an asset of the parent so it has less of an impact on the expected contribution for the child when filing the FAFSA

Planning tip: If you’re worried about which one you should choose and you aren’t contributing more than $15,000, it might be best to start with a UTMA account. You can convert a UTMA account into a 529 savings plan if earnings exceed $1,100 per year to maximize your tax savings.

Is a UTMA available for everybody?

As long as you don’t live in South Carolina, you can open a UTMA account. You typically have to be a US resident (citizen or permanent resident) with a social security number in order to open a UTMA account. Your child also has to have a US social security number.

Where do I open a UTMA account?

You can open a UTMA account anywhere where you can open a brokerage account. Some examples include Fidelity, Vanguard, Charles Schwab, and T. Rowe Price. Most major banks like Bank of America, Wells Fargo, and PNC Bank will also offer a UTMA account. There are a couple of new startups also focused on the space, including UNest and EarlyBird.

Where is the best place to open an UTMA account?

We at Pasito can unequivocally tell you that the best place to open an UTMA account… depends on your situation.

You want to look for a reputable SEC-regulated firm, that offers $0 commissions on trades of funds, stocks, and bonds and has a history of strong performance. 

If you have a physical asset like real estate or artwork you want to gift to a child, you will want to speak to a CFP® professional to make sure it is done right.

Planning tip: The best place for your UTMA account is probably where you currently bank so you can keep tabs on the UTMA account and check the balance regularly. If it’s a pain in the neck to check on it, you probably won’t do it. 

For more articles or guidance, please feel free to reach out to Pasito. Join the Pasito community to get customized financial guidance from CFP® professionals.

Disclaimer: We try our best to provide you helpful content. However, we do not offer financial, legal, or tax advice. Please speak with a professional about your personal situation.

Bruce Spencer III

Bruce Spencer III

Bruce Spencer III is an engineer and personal finance enthusiast. He has a BE in Chemical Engineering from Vanderbilt University and an MBA with a concentration in Finance from the University of Nebraska – Lincoln. Bruce enjoys riding motorcycles, travelling, and finding new ways to pinch pennies just for the fun of it. Bruce is father to Bruce IV (7) and Sabrina (4) and lives in Waveland, MS.
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