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College Planning: UGMA/UTMA Custodial Accounts



UGMA/UTMA Custodial Accounts

What is a UGMA Account/? What is aUTMA Account? Pros and Cons of Custodial Accounts



Custodial Accounts are popular as savings tools for children because they may be used for college planning or for other uses without an education restriction, however, custodial account funds can be transferred to a 529 Plan.



Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA)

  • Custodial accounts are another tax-advantaged way to save for college. As custodian for the account, a parent, grandparent, or other adult makes all the investment decisions until the child reaches the age of maturity. UGMA accounts are limited to cash and securities and can hold other types of property. 
  • You may transfer funds from a custodial account tax free to a 529 Plan if the plan accepts such transfers. Transfers must be cash transfers, so you must liquidate any investments you have made and pay taxes, if any, on any gains. There also may be other restrictions and limitations.
  • For more information visit www.irs.gov.




It is important to note that contributions are considered as “irrevocable” gifts. Therefore, once you set up and contribute to a UGMA/UTMA Custodial Account, those assets belong to the child and you cannot take back any money or assets that have been contributed to the account. The custodian may make certain withdrawals for the benefit of the child. Please be sure to check out the Publication 929 provided by the IRS as well as the advantages, disadvantages and other considerations prior to investing. 




Advantages of UGMA/UTMA Custodial Accounts

  • Favorable Tax Treatment: Assets in the account are owned by the child and therefore are taxed at the child's (usually lower) tax rate.
  • For children younger than 18 (Up to age 24 for full time students in some states) - The first $1,050 in earnings is tax-free. The next $1,050 in earnings is taxed at the child's federal tax rate in 2015. Any earnings over $2,100 are taxed at the custodian's federal tax rate. See IRS Publication 929 and speak with your tax advisor for more details.
  • No contribution or income limitations.
  • The child can contribute to his or her own account.
  • No penalty if account assets are not used for college. Withdrawals can be used for any purpose (by the child and for the child when withdrawn by the custodian).
  • Anyone can open or contribute money on behalf of a child. (The child does not have to be related to the person funding the account.)
  • Investment options are virtually limitless.
  • Assets may be transferred to a 529 plan.


Disadvantages of UGMA/UTMA Custodial Accounts

  • When your child reaches the age of majority, 18 to 25 depending on the state you live in, the child takes over the account and can use the money in the account for anything that he or she wants. You should speak with a qualified tax and legal advisor prior to investing. PT does not offer tax or legal advice. 
  • Contributions are not tax-deductible.
  • Earnings may be subject to federal income or capital gains tax. 
  • Financial Aid: The child's assets are usually figured at a higher rate than the parent's assets or purposes of aid calculations.
  • You may not switch beneficiaries because the account is considered the child's asset.


Other Serious Considerations for Custodians/Parents:

Once you fund your child's account the money belongs to the child. It no longer belongs to you. You cannot take it back, give it to someone else or change your mind. It is not "your money." You cannot take the money out to use for yourself. You have no "right" to force your child to do with it as you wish. This may sound brutally redundant but far too many individuals try to use these accounts to avoid taxes and are very upset to learn that they cannot take the money back for themselves.

Once your child reaches the age of majority the account is owned and controlled completely by your child and you have no right to control either the account, the firm that holds the child's account or what the child does with the money involved.  Although you may have wished that the money be used for college tuition your child has the legal right to spend it on a shiny new red sports car or roll the dice and take it to Vegas if he or she wishes.

If this does not sound right for your situation you may wish to consider a 529 College Savings Plan or a Coverdell Education Savings Account for more control.


Please Note:

UGMA/UTMA Custodial Accounts are now available both via your PT brokerage/online trading account as well as through our full service advisors (which may also be held fund direct with major mutual fund companies). Through your online trading account you will be able to trade stocks, bonds and mutual funds as individual investments in these accounts. Please speak with your experienced financial professional to partner for assistance with mutual funds that are held fund direct.

Please Note: You will not be able to trade stocks, bonds or options as individual investments in accounts that are held fund direct however you will be able to find additional top rated funds to help you meet the savings and investing goals that you have for the special child in your life without having to stress yourself out chasing individual and likely higher risk investments.

Coverdell ESA and 529 Accounts are only available via our full service advisors which may be held fund direct with major mutual fund companies.



All investing involves risk, including the possible loss of principal and there can be no assurance that any investment strategy will be successful.