When saving for your child’s future, you have a number of account options to choose from. A UGMA account can help you start building investments on your child’s behalf, so it can be a useful part of the equation as you prepare to send your child to college or help them get established on their own.

What is a UGMA account?

UGMA stands for Uniform Gifts to Minors Act, and it’s a type of custodial account (meaning it’s managed by an adult on behalf of a minor). Minors aren’t legally allowed to enter into contracts. Generally, this means they can’t own stocks, bonds and mutual accounts. In most states, the minimum age to invest in and trade stocks is 21, and in 10 states, the minimum age is 18. A custodial account or a trust can hold investments until children come of age.

Who Owns the Assets in a UGMA?

The contents of an UGMA account belong to the child, even if they’re a minor and can’t manage stocks on their own yet. Transfers that go into an UGMA or UTMA are irrevocable. An UGMA account has a custodian with a fiduciary responsibility, meaning they’re legally bound to act in the best interests of the child.

UGMA Account Limits and Taxes

Anyone can contribute to an UGMA account, including grandparents or other relatives. Contributions come from after-tax dollars, and you can contribute up to $16,000 or $32,000 for a married couple.

UGMA and UTMA accounts don’t offer as many tax advantages as some other accounts (e.g., 529 college savings account), but they also don't have the same level of limitations and maximums as other child investing accounts. While 529 earnings accumulate tax free, you may need to pay taxes on some earnings in an UGMA or UTMA.

In 2022, the first $1,150 of unearned income for a minor is tax free. The next $1,150 is taxed at the child’s tax rate, which is typically much lower than the parent’s. Any unearned income over $2,300 is taxed at the parent’s tax rate.

Pros and Cons of Opening a UGMA

The main benefit of an UGMA compared to another account like a 529 is that once your child comes of age, they can use UGMA funds for any purpose. When you take funds from a 529 account, you need to use them for qualified education expenses or you’ll get hit with taxes and penalties. Qualified expenses include things like tuition, but there can be some college expenses that don’t count as “qualified.” For example, student transportation or health fees aren’t qualified.An UGMA can also be a more beneficial account for your child if they choose a path other than higher education. UGMA funds could help your child afford a first place to live or pay for a major life event like a wedding.The biggest con we see is that UGMA funds count as a student asset, so they will have a bigger impact on your eligible financial aid, dollar for dollar, than funds in a 529 (which count as a parent asset, since the parent is the account owner).

How to Open a UGMA

UGMA accounts are available in all 50 states. You can open an account through many banks, brokerage firms or some other financial institutions. In fact, you can open one through Fabric by Gerber Life. Make the process as smooth as possible with these tips:

• Compare terms: Different companies may offer UGMAs with different investment options.
• Read fee details: UGMAs may charge different fees depending on which company you go with and how much you manage the account yourself versus use a financial advisor’s services.
• Check your state age of majority: How old will your child be when they can take control over the account?

Preparing a steady financial foundation for your child is a long-term process, and it’s smart to start early. Saving money and teaching your child financial skills (like understanding how investing works) can position your child for success. An UGMA can be a helpful tool to introduce your child to investing and build funds they can use as they enter adulthood.