UTMA vs UGMA Accounts: What's the Difference?

UTMA vs UGMA Accounts Top 7 differencesUTMA vs UGMA Accounts Top 7 differences

Key Takeaways

  • UTMA and UGMA accounts are custodial investment accounts that allow you to invest on behalf of a minor family member.
  • UTMA accounts allow a wider range of assets, including physical property like real estate, while UGMA accounts only allow cash and financial investments.
  • UTMA and UGMA accounts offer investment flexibility, no income or contribution limits, and potential tax savings.
  • Once you transfer property to UTMA or UGMA account, you can't get it back. The minor takes over the account when they reach adulthood.
  • Alternatives to UTMA and UGMA accounts include 529 plans, which may have more tax advantages, and trust funds, which give you more control.

Want to help a young loved one save for the future? You could open a custodial investment account on their behalf. There are two primary types: UTMA stands for the Uniform Transfer to Minors Act. UGMA stands for the Uniform Gifts to Minors Act. Both let you invest in a wide range of assets for a family member who is a minor. Both have potential tax benefits as well as drawbacks to consider. Here's some of what to know about UTMA versus UGMA accounts.

What Are UTMA and UGMA Accounts?

Both operate under the same general system: you transfer cash, investments or other property into the account on behalf of someone who is a minor. A minor generally legally cannot have their own investment account.

You then manage the custodial investment account until the family member reaches the state's age of majority (generally from 18 to 25, depending on the state where the account exists). Once the family member becomes an adult, they take over the investment account.

UGMA accounts allow you to contribute only cash and financial investments such as stocks, bonds and mutual funds. UTMA accounts also allow you to put in physical property, such as jewelry, real estate and vehicles.

Tax Implications of UTMA and UGMA Accounts

UTMA and UGMA accounts can help you reduce the taxes on your annual investment earnings. In 2023, the first $1,250 of investment earnings from these accounts are exempt from federal taxes. After that, the next $1,250 of earnings is taxed at the minor's tax rate. Since your loved one is likely earning little to no income, this is likely a lower tax rate than what you would owe investing yourself. Past that threshold, any gains will be taxed at the tax rate of the minor's parents.

You don't receive a tax deduction for adding money to UTMA and UGMA accounts. Instead, you just reduce the taxes on investment gains.

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Potential Benefits

  • Investment flexibility: You can contribute a wide range of assets into UTMA and UGMA accounts, such as stocks and bonds you already own. You aren't limited to just depositing cash. With a UTMA account, you can even put in real estate, cars and other physical assets.
  • No income, contribution or withdrawal limits: You can open UTMA and UGMA accounts no matter how much you earn. There's no limit to the amount you can put in these accounts annually. Once your loved one is ready to take money out, there's no limit to how much they can withdraw to cover their bills. There are no early withdrawal penalties on these accounts either.
  • Inexpensive and easy to set up: At many companies, opening an UTMA and UGMA account is free. It's like a regular brokerage account where you only pay for investment commissions and fees.
  • Annual tax savings: UTMA and UGMA accounts incur lower taxes on investment income, up to $2,500 per year in 2023.

Potential Drawbacks

  • Transfers are irrevocable: Once you transfer money and assets to an UTMA or UGMA account, it becomes the property of the account beneficiary. You can't later change your mind to take the assets back or give them to someone else.
  • The child takes over at adulthood: Once the custodial account beneficiary reaches the age of majority, they get full access to the account assets. You can't stop them from spending money on a new car, a vacation or clothes.
  • Still owe investment taxes: While UTMA and UGMA accounts save on some taxes, they aren't tax-deferred accounts. You owe taxes on the gains yearly, even if you keep reinvesting everything.
  • Can limit financial aid: Assets in a UTMA and UGMA account count as the property of the minor. So when they apply for college, this could make them less likely to qualify for financial aid.

Other College Savings Plans

Besides UTMA and UGMA accounts, you could also put money aside for college using a 529 plan or a trust fund. Here's a brief overview of each:

529 Plans

529 plans are investment accounts to help save for college. They offer more potential tax benefits and greater control than UGMA and UTMA accounts. If you have money in a 529 plan, you delay taxes on the gains. If your loved one spends the money on college expenses, they avoid owing tax on the investment gains. You also retain control of the 529 account. You could transfer the funds to another family member or even withdraw the money for yourself.

However, 529 plans have more limited investment options versus UTMA and UGMA accounts. You can only deposit cash into the account. You then pick between mutual funds selected by the entity running the 529 plan. If your loved one wants to spend 529 funds on something other than college, they'd also owe an extra 10% withdrawal penalty on top of taxes on the investment gains. The investments within a 529 savings plans are subject subject to market risk. You could lose some or all of the principal amount invested.

Trust Funds

A trust lets you contribute any asset. It offers the same flexibility as a UTMA account. However, a trust fund gives you more control. You can delay giving the property to your loved one for specific milestones. For example, you could only allow the beneficiary access to the money when they turn a certain age. You can also transfer the assets in the trust to someone else.

In exchange, trust funds are more expensive. While setting up a custodial account has low or no setup costs, a trust fund can cost several thousand dollars.

How to Open & Manage a Custodial Account

Now that you better understand what is UTMA vs UGMA accounts, you may be wondering how to open one. You can open a custodial account with many banks, brokerage companies and other financial institutions. When you first apply, you will likely need to provide the name, address and Social Security number of your loved one and yourself. You also need to name a custodian: the person overseeing the investments until your loved one reaches adulthood. You can name yourself.

After opening the account, you can deposit cash into the custodial account to buy stocks, bonds, and other mutual funds through the company offering the custodial account. You could also transfer the ownership title of assets you own to the custodial account. As a custodian, you manage the investments but can't withdraw them for yourself. Once your loved one becomes an adult, they take over the account and the property.

Frequently Asked Questions

How does a custodial account affect financial aid eligibility?

A custodial account may limit financial aid eligibility. Colleges consider the property as belonging to your loved one. As a result, it likely hurts their eligibility more than a trust fund or a 529 plan.

What happens to a custodial account when the minor reaches the age of majority?

When your minor loved one reaches the age of majority, legally, they take over the account. You must transfer the account to them then. You also lose your custodian rights to manage the investments. The account and property fully belong to your minor loved one.

Can I transfer assets between custodial accounts?

Yes, you can transfer custodial accounts after setting them up. For example, you could move a UTMA account at one financial institution into a UTMA or UGMA account at another. However, keep in mind that the account restrictions apply. For example, while a UTMA can hold real estate, a UGMA cannot, so you can't transfer that asset.

Next Steps

Before transferring any money or property to a UTMA or UGMA, understand the tax rules, drawbacks, and custodial account benefits. A financial services professional can help you compare these accounts against other college savings plans. Start building your child's financial foundation today with a tax-advantaged UGMA account. Open a UGMA account now and start investing in their dreams.1


  1. UGMA from Fabric by Gerber Life, a member of the Western & Southern Financial Group Family of Companies. https://www.westernsouthern.com/about/family-of-companies.

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