When it comes to college costs, a little planning can go a long way. There are several useful ways to save money for your child's college education, each of which has its pros and cons.
Two important college savings options to explore are Uniform Gift to Minors Act (UGMA) accounts and Uniform Transfer to Minors Act accounts (UTMA). Although similar in many ways, the main difference between these two accounts is the time at which each account matures.
- UGMAs and UTMAs are mostly the same, but there are a few differences.
- Depending on the state in which you live, the maturity date of your account could be anywhere from age 18 to age 25 of the beneficiary.
- UTMAs allow virtually any asset to be transferred, while UGMAs only allow securities, insurance policies, and cash.
- The tax benefits of UGMAs and UTMAs are identical, with $2,200 being subject to low or no taxes.
- UGMAs only allow transfers until the beneficiary is 18, and UTMAs allow transfers to age 21.
What's the Difference Between UGMA and UTMA Accounts?
|Maturity Date||Up to age 18.||Up to age 25.|
|Tax Benefits||The first $1,050 is tax free. The second $1,050 is taxed at the child's tax rate.||The first $1,050 is tax free. The second $1,050 is taxed at the child's tax rate.|
|Allowable Assets for Transfer||Cash, securities, and insurance policies.||Any kind of asset.|
|Eligible Expenses||Any expense that benefits the child. Not limited to education.||Any expense that benefits the child. Not limited to education.|
|Financial Aid Impact||Counted as child's income when applying for financial aid.||Counted as child's income when applying for financial aid.|
|Termination Date||Age 18.||Age 21.|
Maturity Date: UGMA vs. UTMA
The UGMA and UTMA are custodial accounts, which are used to hold and protect assets for minors until they reach the age of majority in their state. While the beneficiaries of UGMAs can collect their money at the age of 18, in some states, the custodian of the account can specify an age of up to 25 when the beneficiary can access the funds.
Tax Benefits: UGMA vs. UTMA
Every child younger than 19 (or 24 for full-time students) who files federal income tax as dependents of their parents or guardians is allowed a certain amount of unearned income at a reduced tax rate. In 2021, the first $1,100 in a UGMA or UTMA is considered tax-free, and the next $1,100 is taxed at the child’s bracket, which is 10% for federal income tax. Anything above those amounts is taxed at the parents’ rate, which may be as high as 37%. This exemption is per child, not per account.
Because the assets are considered the property of the minor, a certain amount of the investment income will go untaxed, while an equal amount is taxed at the child’s tax rate instead of the parents’ rate.
Allowable Assets for Transfer: UGMA vs. UTMA
UGMA accounts have restrictions as far as what can be transferred into them. Only gifts or transfers of cash, stocks, bonds, mutual funds, and insurance policies may be transferred. UTMAs, on the other hand, have fewer restrictions on what assets are allowed to be contributed into them.
Eligible Expenses: UGMA vs. UTMA
A custodian can initiate a withdrawal for the benefit of the child, as long as the expenses are for legitimate needs. Any expense that is for the benefit of the child, such as pre-college educational expenses, may be paid from the custodial account at the custodian’s discretion. Unlike other college savings accounts, however, these expenses are not limited to education and can be used for anything related to the child. Likewise, upon becoming a legal adult, the child can use the money without limitations.
Impact on Federal Financial Aid Eligibility: UGMA vs. UTMA
Custodial accounts are considered an asset of the child and are counted against financial aid. Approximately 20% of these assets will be expected to be used toward funding a student’s education in any given year.
While you may specify assets from an UTMA or UGMA to be used for college, the beneficiary is not legally obligated to do so. Even so, the funds must be used for something that benefits the recipient of the account.
Contribution Rules: UGMA vs. UTMA
There are no contribution limits in UGMAs or UTMAs. However, someone setting aside money in one of these accounts needs to be aware of how larger gifts affect their annual gift tax and lifetime estate tax exclusions. Consulting a financial advisor is helpful.
Termination Date: UGMA vs. UTMA
Any unused money must be distributed by the time the child reaches the age of majority or the maximum age allowed for custodial accounts in their state. For classic UGMA accounts, this generally occurs at the age of 18. For the newer UTMA accounts, this age is usually 21, but may be as late as 25.
Potential Drawbacks of UGMAs and UTMAs
The same tax benefit that makes UGMAs, UTMAs, and other custodial accounts attractive can also make them tricky. After the first amount of money in income is sheltered from higher taxes, excess income is taxed at the parents’ marginal tax bracket. This wouldn't be an issue with college funds held in a Section 529 plan or a Coverdell ESA. The account format also requires a custodian to hand over control of the assets to the child anywhere from age 18 to 21, depending on the state. While parents who have a good relationship with their child might be able to coerce those assets into actually being spent on college, a strained relationship may present a problem.
Correction - Feb. 11, 2022: This article has been updated to correct a sentence in the Key Takeaways section that lists which assets a UGMA can hold.
Frequently Asked Questions
Which is better, a UGMA, UTMA, or 529 plan?
Deciding between these college savings options will ultimately depend on your family's situation and your goals for the money. A 529 plan will generally offer better tax benefits, but the money must be used for education in order to maximize those benefits. UGMA and UTMA plans, on the other hand, offer more flexibility in how your children can use the money but come with fewer tax benefits. Additionally, only 529 plans can be transferred to other beneficiaries in the family.
When should you start saving for college?
Because of the power of compounding, it's always best to start saving for college as soon as possible, while your children are young. However, retirement should always be your first priority so you can ensure that you'll be in a good position later in life. College comes with financial aid options, after all, and there are ways to accelerate your savings even in your children's teen years.
How much money should I save for my kid's college education?
Your savings goal for college should be based on what you can afford and what you expect from your children in terms of helping to pay for their education. It's helpful to discuss these questions as a family and with a financial advisor to determine an attainable savings target and turn that into a monthly savings plan.
Internal Revenue Service. "Publication 929 (2020), Tax Rules for Children and Dependents."
Internal Revenue Service. "Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)."
Internal Revenue Service. "Revenue Procedure 2019-44," Pages 7-8.
Social Security Administration. "The Legal Age of Majority for Uniform Transfer to Minors Act (UTMA)."
Internal Revenue Service (IRS). "Topic No. 313 Qualified Tuition Programs (QTPs)."
Internal Revenue Service (IRS). "Topic No. 310 Coverdell Education Savings Accounts."