Education is the key, but finance can inhibit someone from acquiring a degree. It is safe to start saving for your kid’s education. And choosing the correct type of account allows you to enjoy all the benefits accured to it. So which is considered the best, UGMA or UTMA Accounts?
You may wonder why UGMA or UTMA accounts are required. These two custodial accounts allow a guardian or adult to transfer cash, investments, and real estate to the report.
UGMA vs. UTMA accounts: Which is better solely depends on you. Knowing the features of each account makes it easier to select the correct version.
This article will review UGMA vs UTMA features, pros and cons. You will also see a guide on how to open any of these accounts.
Table of contents
What is UGMA Account?
UGMA stands for Uniform Gifts to Minors Act. It is a brokerage custodian account under a state’s law that holds gifts or transfers that a minor has received.
This type of account allows minors to receive gifts like property without establishing a formal trust. In this type of account, the donor gives up all possession and control held in their name for the benefit of the minor without an attorney needing to set up a special trust fund.
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What is UTMA Account?
Unlike UGMA, UTMA allows minors to receive money and real estate without aid. The acronym stands for Uniform Transfers to Minors Act, set up for the beneficiary’s benefit.
A responsible person known as a legal guardian must administer this. And he has a fiduciary obligation to the beneficiary. With a UTMA, an adult can transfer assets to a minor when they open a custodial account.
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What is a Custodial Account?
When an adult sets up and administers a savings account for a minor, it is a custodial account. Such accounts are flexible and have no income or contribution limits. Also, there are no withdrawal penalties attached to this account.
According to Investopedia, a custodial account can mean any account maintained by a fiduciarily responsible party on behalf of a beneficiary, such as an employer-based retirement account handled for eligible employees by a plan administrator.
Gifts made to custodial accounts are irrevocable, and they cannot be adjusted or reversed. In this context, a minor refers to individuals under 18 or 21 years of age, depending on state laws.
How Do UTMA/UGMA Work?
Like other custodial accounts, once set up, any adult can contribute to the account until the minor attains a certain age. This type of account can help your loved one achieve their financial goal in the long run.
According to state law, the minor can only access whatever is being deposited in this account once they attain 18 or 21 years. Irrespective of why the account was set up, the minor can spend the assets however they like.
Hence, if you wish the assets to be spent a particular way, UGMA and UTMA may not be the best option. You should consider other custodial saving accounts to achieve this. Interest earnings are not taxed; others will be taxed based on child tax.
Passed in the 1950s, UGMA provides an alternative to family trust funds. UTMA was introduced in the 1980s; this custodial account includes real estate in the assets a custodian can gift a minor.
How To Open a UTMA/UGMA Account
UGMA and UTMA are best if you do not care what their child does with the assets afterwards. To open these accounts, contact an account provider and choose the best brokerage account.
Consider your investment style, horizon, and location. Next, consider what type of assets to save and how long you intend to save.
We must consider your appetite for risk and tolerance. Decisively, some accounts can be riskier than others. Finally, consider your stockbroker’s administrative, setup fees and management costs.
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UGMA vs UTMA Account: Key Differences
The critical difference between these two custodial accounts is the type of assets they can hold. While UTMA can hold financial and physical assets such as real estate, jewellery, and fine art, UGMA can only hold individual stocks, bonds, mutual funds, index funds, cash, and insurance policies.
Another notable difference between these two is the law that governs them. Two separate laws govern the two types of custodial accounts.
UGMA, passed in 1956 and revised in 1966, has now been adopted by all states. UTMA, passed 30 years after UGMA, sets most of the terms and conditions of these custodial accounts.
UTMA vs UGMA: Key Similarities
These Custodial accounts share lots of similarities, advantages and disadvantages. Below are some of them:
- Flexibility to use the funds for any purpose when you contribute to your child’s account.
- Contribute as much as you want, making saving for their future easy.
- An excellent opportunity to teach them about financial literacy and involve them in investment decisions.
- Control the account until the child reaches adulthood, but the minor owns every asset within the budget. This ensures that your contributions will benefit your child.
- Income generated in these accounts is typically taxed at a lower rate, which can lead to significant tax savings.
- Full control of the assets by beneficiaries once they reach the age of majority
- Setting up these accounts is relatively easy through a bank or brokerage firm, making it a convenient option for saving for your child’s financial future.
- Transferred assets are irrevocable.
Pros and Cons of UTMA/UGMA
| Benefits of UTMA or UGMA accounts | Cons of UTMA or UGMA accounts |
| Flexibility | Irrevocable gift |
| Easy to set up | Minor gains control at the age of majority |
| No contribution limits | No tax benefits |
| No withdrawal restrictions | Reduced financial aid eligibility |
| A great way to teach about financial literacy. | Limited investment options |
Frequently Asked Questions
The major difference between UTMA and UGMA accounts is that UTMA can hold physical assets like real estate, fine art, and jewellery in addition to financial assets.
The main advantage of these accounts is that beneficiaries can spend the money whichever they like once they reach a certain age. Also, assets paid into these accounts can not be revoked.
The minor whose name the account was opened owns the money in the UTMA account.
Yes, the guardian can withdraw money from the UTMA account if it will benefit the child.
Conclusion
Saving to achieve a particular goal is exceptional. Helping your minor master financial management is also great.
With UTMA and UGMA accounts, you can help your ward attain a financial goal in the future. However, if you would love to save specifically for college, there are better account types. Read through this piece to identify the importance of saving for your ward using this means.
References
- Investopedia.com – What is a Custodial Account?
- Smart Asset.com – UGMA vs UTMA
- Forbes.com – UGMA vs. UTMA vs. 529 Plans: Which Is Best for You?
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