What is a UGMA and UTMA Account?

A UGMA account (Uniform Gifts to Minors Act) is a custodial account that allows adults to transfer financial assets to minors without establishing a formal trust. Similar to UTMA accounts (Uniform Transfers to Minors Act), these accounts hold assets managed by a custodian until the child reaches adulthood.

They are opened and held through a bank or brokerage account and may contain cash, mutual funds, stocks, and bonds. UTMA accounts can also contain real estate and other tangible assets. The parent or another relative maintains control of the account in the name of the minor until the child reaches adulthood (the age of majority in your state).

Knowing the acronyms is great, but it’s essential to fully understand how UTMA and UGMA accounts work, their benefits, and how they compare to 529 plans before opening one.

Key Differences Between UGMA and UTMA Accounts

While UGMA and UTMA accounts both allow adults to transfer assets directly to minors without establishing a formal trust, the primary difference is the type of assets each account can hold.

• UGMA accounts typically hold financial assets like cash, stocks, bonds, mutual funds, and insurance policies.
• UTMA accounts can include everything allowed in UGMA accounts, plus real estate, intellectual property, artwork, and other tangible property.

Additionally, the age of majority (when the minor gains control of the account) may vary slightly between UGMA and UTMA depending on state laws. UTMA typically allows custodianship until age 21 in some states, compared to UGMA’s typical age of majority of 18.

All states have adopted the UGMA. Additionally, all states except Vermont and South Carolina have adopted the Uniform Transfers to Minors Act (UTMA), which expands on UGMA and generally supersedes it where adopted.

UTMA/UGMA Accounts: Impact on Financial Aid

UTMA and UGMA accounts are assessed more heavily in financial aid calculations because they’re considered the child’s assets, potentially reducing eligibility for need-based aid significantly compared to 529 plans. For FAFSA (Free Application for Federal Student Aid), UGMA and UTMA accounts are reported as a child’s asset, reducing financial aid eligibility by 20% of the asset value.

Since parents usually report 529 college savings plans as an asset, they reduce aid by up to 5.64% of the asset value.

UTMA/UGMA accounts offer greater spending flexibility than 529 plans. The money can be used without penalties on any expense benefiting the child, not just educational costs. However, they lack some of the tax benefits and favorable treatment in financial aid calculations.

UTMA and UGMA Account Taxes and Contribution Limits

UTMA and UGMA accounts don’t offer the same tax advantages as a 529 plan offers. 

You make contributions with after-tax dollars. According to IRS rules, you can contribute up to $19,000 annually without incurring a gift tax ($38,000 per married couple).

For 2025, the first $1,350 of your child’s unearned income is tax-free yearly. The next $1,350 is taxed at your child’s rate (known as the “kiddie tax”). Amounts above $2,700 are taxed at the parent’s tax rate, which could be significantly higher.

For example, if the account earns $3,500 this year, $1,350 is tax-free, the next $1,350 is taxed at the child’s lower rate, and the remaining $800 is taxed at the parent’s higher rate.

Compare this to 529 plans, which offer tax advantages: earnings grow tax-deferred and can be tax-free if they meet certain withdrawal conditions.

Flexible Spending

However, UGMA and UTMA accounts provide more flexibility in how the funds can be used compared to a 529 plan. You’ll need to use the funds in a 529 plan for specific educational expenses, including tuition, books, supplies, and a computer, to avoid a penalty. You can use funds in a UGMA/UTMA account for anything.

While your child is still a minor, you can use the funds in a UTMA or UGMA account to pay for expenses that benefit the child, such as school clothes and summer programs.

UGMA/UTMA Age of Majority by State

Once your child reaches adulthood, the UGMA funds belong to them. The age at which they gain access to the funds depends on the state, though:

Who Should Choose a UTMA/UGMA?

UTMA or UGMA accounts can be an excellent choice for parents or relatives who:

• Want flexibility to spend on non-education costs.
• Are comfortable with less favorable financial aid implications.
• Want the child to automatically gain control of the funds upon reaching adulthood.

Conclusion

A 529 plan and a UTMA or UGMA account can set you on the right track for college savings. Saving money in a UGMA or UTMA savings account in addition to a 529 plan could help pay for non-qualified expenses, such as application and testing fees, transportation costs during college, health insurance, medical bills, and other miscellaneous expenses.