At Dovermont Wealth & Tax Solutions, we believe every family—no matter where you live or what you earn—deserves the tools to build a brighter financial future for their children. That’s why we’re passionate about breaking down complex topics into simple, actionable steps. Today, we’re diving into UGMA and UTMA accounts: what they are, how they work, and why they might be the “grown-up piggy bank” your family needs.
What Are UGMA & UTMA Accounts?
Imagine your child receives a birthday gift from grandma, or you want to start putting money aside for their future. Where do you put that money so it grows, instead of just sitting in a piggy bank? Enter UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts.
These are special custodial accounts that allow an adult (usually a parent or guardian) to manage money and investments for a child until they reach adulthood (typically 18 to 25, depending on your state). The money is legally the child’s, but you control it until they’re old enough to take over.
- UGMA accounts can hold cash, stocks, bonds, and mutual funds.
- UTMA accounts can hold all of the above, plus physical assets like real estate, art, or even jewelry.
Why Consider a Custodial Account?
1. Flexibility:
Unlike 529 college savings plans, UGMA/UTMA accounts aren’t just for education. The money can be used for anything that benefits the child—school, sports, a first car, or even starting a business.
2. Anyone Can Contribute:
Parents, grandparents, friends, and other family members can all add to the account. There’s no strict annual contribution limit, but gifts over $19,000 per person per year (as of 2025) may require extra tax paperwork.
3. Simple Setup:
No need for expensive lawyers or complicated trusts. These accounts are easy to open at most banks or investment firms.
The Tax Side—Explained Simply
Here’s where it gets a bit technical, but we’ll keep it simple:
- The first $1,350 of earnings in the account each year is tax-free.
- The next $1,350 is taxed at the child’s (usually low) rate.
- Anything above $2,700 is taxed at the parent’s rate. This is called the “kiddie tax”—a rule to prevent parents from sheltering income in their child’s name.
Example:
If your child’s account earns $3,000 in a year:
- $1,350 is tax-free
- $1,350 is taxed at your child’s rate
- $300 is taxed at your rate
Also, these accounts are not tax-deferred. You pay taxes on the earnings every year, not just when you withdraw.
Pros and Cons at a Glance
Pros:
- Easy to set up and manage
- Anyone can contribute
- Funds can be used for any purpose that benefits the child
- No penalty if not used for college
Cons:
- When your child becomes an adult, the money is theirs—no strings attached
- Can reduce eligibility for college financial aid (since the money counts as the child’s asset)
- Taxes can get complicated if the account earns a lot
What About Families Outside the U.S.?
If you’re reading this from outside the United States, you might not have access to UGMA or UTMA accounts. But the principle is the same: look for savings and investment vehicles in your country that allow you to set aside money for your child’s future. In Canada, for example, there’s the RESP; in the UK, the Junior ISA. The most important thing is to start early and make saving a habit.
Alternatives to Consider
- 529 College Savings Plans: Great for education, with tax benefits, but must be used for qualified expenses.
- Roth IRA for Kids: For children with earned income (like a summer job).
- Trusts: Offer more control, but are more complex and costly to set up.
Final Thoughts
Building wealth for your kids doesn’t have to be complicated or reserved for the wealthy. With the right tools and a little know-how, you can give your children a financial head start that lasts a lifetime.
If you have questions about UGMA, UTMA, or any other savings options, reach out to us at Dovermont Wealth & Tax Solutions. We’re here to make money simple, logical, and doable—wherever you are in the world.
Ready to start building wealth for your kids? Contact us or follow us on social media for more easy money tips!
Disclaimer: This blog is for educational purposes only and does not constitute financial advice. Please consult a qualified advisor for guidance specific to your situation.