WHAT IS A UTMA ACCOUNT AND WHY YOU SHOULD CONSIDER ONE FOR YOUR KIDS?
Updated: 6 days ago
TL:DR
If you’re a parent who’s already thinking about your child’s financial future (kudos to you!), chances are you’ve heard the term UTMA account thrown around. But what exactly is it? And more importantly, how can it benefit your little one as they grow? Let’s break it down into bite-sized pieces (no financial jargon, promise!) so you can decide if this account is a good fit for your family.
What is a UTMA Account?
UTMA stands for Uniform Transfers to Minors Act. Think of it as a special type of custodial account that allows you to save and invest money, as well as transfer other assets (like stocks, bonds, or even real estate), for the benefit of your child. Essentially, you’re acting as a financial steward until your child becomes an adult.
Here’s the catch: once your child reaches a certain age (usually 18 or 21, depending on the state), they gain full control of the account. Yep, that means they can use the money for whatever they want—college, a car, or even that questionable business idea they’ve been talking about since they were 12.
How to Open a UTMA Account
Opening a UTMA account is surprisingly straightforward:
1. Choose a Custodian (That’s You!)
As the parent (or grandparent, guardian, etc.), you’ll act as the custodian managing the account.
2. Pick a Financial Institution
Banks, brokerage firms, and credit unions offer UTMA accounts. Think about whether you want the money to simply sit in savings or be invested in index funds, individual stocks, bonds, or mutual funds.
3. Provide Basic Information
You’ll need both your information and your child’s information (name, date of birth, Social Security number).
4. Fund the Account
This could be a one-time deposit, regular contributions, or gifts from family members. Some families use this as a way for grandparents to help build a college fund or pass down assets.
5. Choose Investments (Optional)
If you go the investment route, decide how to allocate funds. Riskier investments (like stocks) may yield higher returns, but savings accounts can provide stability. Neither choice is wrong and you can also always choose both if your finances permit!
What Are The UTMA Account Rules?
Since the money in a UTMA account legally belongs to the child, any withdrawals must be used for their benefit—think education expenses, extracurricular activities, medical costs, or anything that directly helps them. You cannot use the funds for things like your own bills or family vacations (tempting, we know!).
Once the child reaches the age of majority (usually 18 or 21, depending on your state), they gain full control of the account. At that point, they can spend the money however they choose—whether that’s for college, a car, or even a business startup.
So, while you have flexibility in how you use the funds before they reach adulthood, just make sure every dollar goes toward something that benefits them!
UTMA accounts are a great way to invest for your child’s future, but they do come with some tax rules you’ll want to keep in mind. Let’s break it down in a simple way!
How Are UTMA Accounts Taxed ?
Unlike traditional savings accounts, UTMA accounts aren’t tax-free. Here’s how it works:
The first $1,350 of earnings (dividends, interest, capital gains) is completely tax-free in 2025.
The next $1,350 is taxed at the child’s tax rate (which is usually lower than yours).
Anything over $2,700 is taxed at your tax rate (this is called the "kiddie tax").
This means if the account is earning big returns, the tax bill could creep up, so it’s good to plan ahead!
Who Pays Taxes on UTMA Accounts?
Since the money legally belongs to the child, the child is technically responsible for the taxes. But since most kids don’t file tax returns, parents usually handle it. If the account earns less than $1,350, you typically don’t have to file. If it earns more, you may need to file a return for your child or report it on your own taxes.
How to Avoid Gift Tax
One big perk of UTMA accounts is that you can contribute without triggering the gift tax—as long as you stay under the IRS’s annual gift tax exclusion (which is $19,000 per child in 2025). This means you and a spouse could contribute up to $38,000 per child per year without any tax worries.
If you want to contribute more, you can spread the gifts over multiple years or look into a 529 plan, which allows for superfunding (basically front-loading five years of gifts at once).
UTMA accounts are a smart way to invest in your child’s future, but taxes can be a little tricky. Keep an eye on earnings, file taxes as needed, and stay within gift tax limits to avoid any surprises. And of course, if the account starts growing significantly, it might be worth chatting with a tax pro to maximize benefits!
The Pros and Cons of UTMA Accounts
So, let's summarize the pros of UTMA accounts.
1. Flexibility in Asset Types
UTMAs aren’t limited to cash. You can transfer a variety of assets, including real estate and artwork. This makes it unique compared to other accounts like 529 plans.
2. Potential Tax Benefits
Earnings in a UTMA account are taxed at your child’s (lower) tax rate, up to certain limits. This can be a smart move for families who want to minimize tax burdens.
3. No Usage Restrictions
Unlike 529 plans, which are strictly for educational expenses, UTMA funds can be used for anything (first home, wedding, or that crazy business idea) once the child takes ownership.
4. Ease of Gifting
It’s an efficient way to gift assets to your child while taking advantage of federal tax exemptions (up to $19,000 per year per parent in 2025).
The Cons of UTMA Accounts
Of course, no financial product is perfect. Here’s where UTMAs have some potential drawbacks.
1. Loss of Control at Adulthood
Once your child reaches the age of majority, the money is theirs—no strings attached. While many kids will use it responsibly, there’s always the risk of it being spent on something you wouldn’t approve of.
2. Impact on Financial Aid
UTMA accounts are considered your child’s asset in the eyes of FAFSA (the Free Application for Federal Student Aid). This can reduce the amount of financial aid they’re eligible for when applying to college. We talked more about this here.
3. No Tax Deferral
Unlike 529 plans or Roth IRAs, UTMAs don’t offer tax-deferred growth. While the tax benefits for minors are appealing, you’ll still pay taxes on any earnings above a certain threshold.
4. Irrevocable Transfers
Any assets you put into the UTMA account are legally your child’s. There’s no taking it back if you change your mind later.
Why Should Parents Consider a UTMA Account?
If you’re still on the fence, here’s why a UTMA account might be a solid choice for your family:
1. Teach Financial Responsibility
By the time your child takes over the account, they’ll (hopefully) have learned the value of saving, investing, and spending wisely. In addition to teaching your kids about money (with the help of KidVestors of course) this account can serve as an additional hands-on financial literacy tool.
2. Diversify Savings Options
UTMAs provide more flexibility than traditional college savings accounts. Whether your child wants to start a business, study abroad, or pay for college, the funds are available.
3. Make Gifting Easy
If grandparents or other relatives want to contribute, a UTMA account provides a simple way to pool resources.
4. Build Generational Wealth
Starting an account early gives your child a financial head start. Add some savvy investments, and you could be setting them up for a solid financial future.
UTMA Accounts vs. Other Kid-Friendly Accounts
Still deciding? Let’s compare a UTMA to a couple of other popular options:
Feature | |||
Flexibility | Can be used for anything | Must be used for education | Child must have earned income |
Tax Benefits | Taxed at child’s rate | Tax-free for education | Tax-free after retirement |
Control | Child gains control at adulthood | Always parent-controlled | Child gains control at 18/21 |
How to Decide if a UTMA is Right for Your Family
A UTMA account can be a great tool, but it’s not a one-size-fits-all solution. Ask yourself:
Do I trust my child to manage this money when they’re 18 or 21?
Am I okay with the potential impact on financial aid?
Do I want to save for expenses beyond education?
If you answered “yes” to these, a UTMA account might be a good fit. If not, consider alternatives like a 529 plan or even a custodial Roth IRA if your child has earned income.
At the end of the day, a UTMA account is like a little financial gift box that grows alongside your child. Whether you’re saving for college, a first car, or even their dream of opening their first business this account gives you the flexibility to set them up for success.
While it’s not perfect (no financial tool is), a UTMA account can be a fantastic option for parents who want to pass down assets and teach their kids about money. Just remember to weigh the pros and cons, explore alternatives, and most importantly, involve your child in the process.
After all, understanding how money works is one of the best gifts you can give them.
FINANCIAL EDUCATION & INVESTING FOR KIDS AND TEENS
Enroll your student in our financial literacy course and app here.
If your school or group is looking for a finance curriculum to teach your students about how to manage money, start here to learn more on how to bring KidVestors to your classrooms!
Parents, teach your kids money and make money conversations normal in your household by visiting here.
댓글