Almost every parent has that burning desire do the very best they can for their children. It’s why parents scrape and scrounge money for private schools, abroad trips, riding lessons, the latest technology, sports gear, coaches, tutors, organic food, better neighborhoods, it never seems to end. That’s why I think every parent should at least consider opening a UGMA or a UTMA account.

What are UGMA and UTMA accounts?

UGMA is an acronym for “Uniform Gift to Minors Act” and UTMA stands for “Uniform Transfer to Minors Act”.
Basically, you open a UGMA or UTMA for your child, and your child owns it with your oversight. Contributions cannot be withdrawn once made, unless the withdraw directly benefits the child AND is not spent on a “parental obligation” expense such as housing, food, and clothing”. Expenses such as sports gear, coaching, tutoring, technology, camps, abroad trips, local trips, or most leisure activities for the child, are permitted. When the child becomes a majority age (which is 18 in most states), the money is automatically his or hers, to use freely as he or she wishes. There are no limits or restrictions on the money at this time.

UGMAs allow you to invest the money into stocks, mutual funds, and fixed income investments (like bonds, CDs, and notes).
UTMAs allow you to invest in a greater variety, including stocks, mutual funds and fixed income investments, as well as annuities, and hard assets (like precious metals, gold, oil, natural gas, farmland, real estate, and art).

 

The Pros of UGMA / UTMA accounts:

• It may lower your taxes. The first $1000 is untaxed. The second $1000 is taxed at a child’s tax rate (if the child still a child of course). Any money over $2000 is taxed at the child’s or parent’s marginal tax rates, depending on which is greater.
• Absolutely anyone can contribute. This means aunts, uncles, grandparents, or even that overly friendly lady across the street can contribute to your child’s UGMA / UTMA. 
• There are no contribution limits.
• It’s a good way to invest on your child’s behalf, giving him or her an early lesson in wealth creation, money management, and investing techniques.
• It also does the obvious task of giving your child a head start on their wealth building through the financial contributions. 

The Cons of UGMA / UTMA accounts:

• If you make annual contributions greater than $14,000 for a single parent, or $28,000 for joint married couple, you have to pay a federal gift tax.
• Once the child reaches the age of majority, the parent has absolutely no say in how the money is spent (I suppose this could be on the pro list if you’re the child). If you don’t like this, a UGMA / UTMA is probably not right for your family. Consider a 529 plan that keeps the parent in control of the money, even after the age of majority is reached.
• The UGMA / UTMA accounts affect your child’s ability to qualify for federal financial aid, because it is in your child’s name. You can however, spend all or most of the money on your child before filling out financial aid paperwork to avoid any problems. 
• The money put into the account is irrevocable. If you put in $500 this month, and you suddenly realize you’re $100 short for rent, that money cannot be touched, no matter what. 
• If the custodian of the account (usually the parent) dies before the child becomes a majority, the account is taxed as if it’s part of the parent’s estate. 

Does the Money Grow?

It depends on how you invest and manage it! This all comes down to your decisions are the custodian. Because of the uncertainty in investing, many parents opt in to mutual funds, where the investing is handled by a professional, at risk levels the parent chooses.
Here are some growth possibilities via mutual fund investing:

1. 5% annual return with $25 / month contribution. Your child is born and you immediately set up an account. You have $25 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $5,504 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $25 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $8,827.

2. 5% annual return with $50 / month contribution. Your child is born and you immediately set up an account. You have $50 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $8,971 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $50,a month until he or she comes of age. If the age of majority in your state is 18, your child will have $13,063.

3. 5% annual return with $100 / month contribution. Your child is born and you immediately set up an account. You have $100 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $22,016 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $100 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $34,907.

4. 7% annual return with a $25 / month contribution. Your child is born and you immediately set up an account. You have $25 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $6,329 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $25 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $10,669.

5. 7% annual return with a $50 / month contribution. Your child is born and you immediately set up an account. You have $50 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $12,658 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $50 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $21,334.

6. 7% annual return with $100 / month contribution. Your child is born and you immediately set up an account. You have $100 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $25,317 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $100 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $42,668.

7. 10% annual return with $25 / month contribution. Your child is born and you immediately set up an account. You have $25 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $7,836 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $25 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $14,549.

8. 10% annual return with $50 / month contribution. Your child is born and you immediately set up an account. You have $50 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $15,672 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $50 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $29,098.

9. 10% annual return with $100 / month contribution. Your child is born and you immediately set up an account. You have $100 a month automatically deposited into the account. When the child turns 13, you can start using the money on him or her. At this point, there is $31,343 in the account. You can dip into it and deplete it over the next few years before college (so you can qualify for federal financial aid for college). Or, you can continue contributing $100 a month until he or she comes of age. If the age of majority in your state is 18, your child will have $58,196.

 

 

What are your thoughts on UTMA / UGMA accounts? Would you (or have you) set one up for your child? Share that in the comments please!