< DICTIONARY

UTMA Account

An investment account set up by an adult for the benefit of a child and managed by the adult until the child reaches adulthood.

The funds and assets in the account are legally owned by the child and may benefit from the child’s lower tax rate.

Especially useful to invest for a child's future with no strings attached and to teach kids how investing works.

UTMA Account

What is a UTMA account?

A UTMA account is a custodial financial account set up by an adult for the benefit of a minor until the minor reaches adulthood. Typically the term UTMA account refers to custodial investment accounts or taxable brokerage accounts that adults open for children.

These accounts are one type of investment accounts for kids.

Through UTMA accounts, a custodian (the adult, often the child’s parent) can buy securities like stocks, bonds, ETFs and other securities and manage the investments on the child's behalf.

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In plain English – these are investment accounts that an adult opens for a child. The adult deposits money into the account, and then chooses investments. The investments can grow over time, and when the child becomes an adult, the custodian transfers the account over to the young adult.

What does UTMA stand for?

UTMA stands for Uniform Transfers to Minors Act.

It's the name of uniform law suggested to US States by the National Conference of Commissioners, a body that drafts and proposes laws to be passed in all States for consistency. It's up to each State to choose whether to accept and add the law to the local laws.

The law provides a simple method to give financial gifts to minors and invest money on their behalf.

UTMA accounts are an evolution of the UGMA (Uniform Gifts to Minors Act) accounts, and both are defined on State level legislation. As such, there may be differences in UTMA accounts across the different states.

UTMA Account Rules

The account and assets it holds are legally owned by the child, and are only managed by the adult until the child becomes "of age". Different States have different definition for “of age”.

Some States mandate the transfer happens as early as 18, some at 21, and some allow the accounts to be held by the custodian as late as the age of 25.

Some States mandate the transfer happens as early as 18, some at 21, and some allow the accounts to be held by the custodian as late as the age of 25.

All the assets in the account are legally considered to be owned by the child, not the adult who oversees it.

Money or securities transferred and held in a UTMA account are considered an irrevocable gift, officially owned by the account beneficiary. It cannot be refunded to the parent or donor.

When the child reaches the age defined in the State, the custodian needs to transfer the account over and end the custodianship.

While typically the term UTMA/UGMA account refers to a custodial brokerage account, UTMA accounts can technically mean other types of custodial accounts, including custodial IRA accounts or custodial savings accounts.

Profits in the account may be entitled to the child's lower tax rate.

UTMA taxes

UTMA accounts are funded with after-tax dollars and don’t provide any tax deferred benefits. Investment earnings are taxed as unearned income and there are no additional taxes on withdrawals from the account.

Since UTMA accounts are owned by the minor, the account profits may benefit from the child’s lower tax rate. If your kids have income-generating investments in the account, profits on the investments are considered “unearned income” and are taxed at the child’s income tax level, usually lower than the parent’s tax rate.

If your UTMA account earns less than $1,150, you and your child won’t have to pay any taxes on it. If it earns more than $1,150 and less than $2,300, your child will owe taxes on the earnings above $1,150 based on the child’s tax rate.

Dependents have a standard deduction of $1,150 on unearned income, meaning they don’t need to pay any taxes on unearned income if it is less than $1,150 for the year 2022.

However, if the earnings in the account are more than $2,300, the Kiddie Tax kicks in and anything above that is taxed at your (the parent’s) taxes.

If your UTMA account earns less than $1,150, you and your child won’t have to pay any taxes on it. If it earns more than $1,150 and less than $2,300, your child will owe taxes on the earnings above $1,150 based on the child’s tax rate.

UTMA accounts work similar to regular taxable brokerage accounts. They don't offer any special tax breaks, but they do offer flexibility in the use of their funds.

Can you withdraw money from a UTMA account?

Money can be withdrawn from a UTMA account in two scenarios – the first, when the child reaches adulthood, and second, if the adult custodian needs to use money from the account to pay for something that benefits the child.

This means that the adult can use some of the funds to pay for different expenses that benefit the child, from education costs to summer camps, and even the kid’s first car.

Money can be withdrawn from a UTMA account in two scenarios

UTMA accounts also allow parents to use the funds for their own living expenses, since paying for their expenses helps the custodian support the minor.

When the child turns 18 or 21 (depending on the State) the UTMA account transfers over. From that point, the new adult can withdraw the money from the account and use it for anything at all.  

What happens to a UTMA account when the child turns 18?

Control of UTMA accounts need to be transferred to the child when the child turns 18 (or 21 or 25, depending on the state). At some financial institutions, the UTMA accounts become restricted accounts once the child passes the state-mandated age until control is transferred to the young adult.

Once the account is transferred to the child, the child can choose to keep using the account and invest, sell some of the investments and take cash out of the account, or even sell all of the investments and close the account.

The process of handing over the control has to be initiated by the parent (custodian). Typically, the parents are notified by the financial institution when the transfer needs to happen. Ask your brokerage to find out the exact details and steps required to transfer ownership and access in the account to the child.

Money, investments, and assets held in the UTMA that are legally owned by the child are now available for the child to use.

There are no withdrawal-specific taxes, but the child may be required to pay taxes on any gains, interest or dividends in the account.  

UTMA vs UGMA

Both UTMA and UGMA serve the same purpose and are largely similar, except for a few minor differences.

UTMA and UGMA mean basically the same thing – an investment account that is owned by a minor and is managed by an adult until the child comes of age.

Today, many financial institutions use UTMA accounts and UGMA accounts interchangeably (and sometimes UTMA/UGMA accounts).

Both UTMA and UGMA mean basically the same thing – an investment account that is owned by a minor and is managed by an adult until the child comes of age.

Both accounts allow legally transferring money and investments and managing it for them. UTMA accounts expand the definitions to allow transferring of assets like patents, real estate and art in addition to traditional securities.

The Uniform Transfers to Minors Act (UTMA) is in fact an extension of the Uniform Gifts to Minors Acts. Both are laws that were recommended to States as an official way for children to own investments. UGMA was introduced first and then UTMA expanded a few key concepts if the law.

UTMA vs 529

529 plans are meant for saving and investing for the education expenses and offer tax benefits when used for education spending, while UTMA accounts are general investment accounts owned by minors and managed by adults.

529 plans have a withdrawal penalty if the funds are not used for a qualified expense, making UTMA accounts more flexible than a 529 plan.

On the other hand, having investments in a 529 plan may encourage the use of the funds towards higher education. 529s have a clear purpose and actually have penalties if the funds are not used for education expenses. UTMA accounts, in contrast, are general purpose investments, and could be used and squandered by the child.

If your child ends up not going to college, a UTMA account may be preferable to a 529.

UTMA accounts have no strings attached, but that could also be their fault, especially when you think of handing over the control of an account with large amounts of funds to an 18 year old.

When it comes to tax benefits, 529 plans have a slight advantage, but only if the funds go towards qualified education expenses.

However, if your child ends up not going to college, a UTMA account may be preferable to a 529. The taxes on the 529 profits combined with the 10% penalty for unqualified expenses can take a big toll from your investment.

Many 529 plans offer managed investment portfolio at low management fees, ideal if you prefer a hand-off investment approach. UTMA accounts, like regular brokerage accounts, offer a variety of options and let you choose your own investments.

You may find managed portfolio at UTMA accounts like the Fidelity UTMA account, but it is up to you to choose this as an option.

How to open a UTMA account

Opening a UTMA / UGMA account is easy and quick online.

Prepare your personal information and that of the account’s minor owner – the child that will own the assets in the account. Make sure you have the child’s social security number and address handy. You may be required to submit personal identification documents for yourself or for the child, depending on the brokerage you work with.

Opening a UTMA / UGMA account is easy and quick online.
  1. Go to your favorite brokerage’s website and find the “open new account” button.
  2. Follow the online steps to create your user login and the UTMA/UGMA account.
  3. Once the account is set up you can start funding it. You can use your own money or financial gifts that you received for your kid.
  4. Transfer the funds into the account, and start buying ETFs, stocks, bonds or other securities with the cash in the account! Put the money in the account to work.

That's it!

Keep an active eye on the account and the investments. Remember it is your job as custodian to manage the account until the child becomes an adult.  

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