These custodial accounts, which are named for the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), let investors take advantage of the lower tax rate for children while saving for education.
Who Should Consider an UGMA/UTMA Account?
Investors who want a tax-advantaged investment
Anyone can contribute up to $15,000 per child each year free of gift-tax consequences ($30,000 for married couples). This amount is indexed for inflation and may increase over time. Because contributions are made with after-tax dollars, a deduction cannot be made.
For children under age 19 and full-time students under age 24 whose earned income is less than one-half of their support, the first $1,100 of earnings is tax-free. Earnings between $1,100 and $2,200 are taxed at the child’s rate; earnings above $2,200 are taxed using the brackets and rates for estates and trusts.
Investors who aren’t confident the beneficiary will attend college
UGMA/UTMA accounts aren’t limited to education expenses. Withdrawals can be used for anything that benefits the beneficiary.
Investors who want the beneficiary to gain control of the account
Once the age of majority has been reached — 18 or 21 in most states — the beneficiary is entitled to the account.
Investors who expect to make large contributions
There are no contribution limits on UGMA/UTMA accounts.