Using an UGMA or UTMA Account to Pay for College

Children are unable to enter contracts, which limits their ability to invest money in their name before they become an adult. The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) provide a way for a parent to establish an investment account, in the child’s name, through a bank or brokerage firm. You can then invest on behalf of your child. The custodial account requires fiduciary responsibility on the part of the custodian, to act in the best interest of the child and transfers into the child’s name at the age of majority. Essentially a trust, the UGMA and UTMA accounts allow parents, grandparents or other interested parties to invest in stocks, bonds, and in some cases real estate or other investment vehicles on behalf of a child.

Key Benefits of the UGMA and UTMA Accounts

There are no annual contribution limits, although any deposits over $14,000 per person, per year, may be subject to a gift tax.

Money can fund any purpose with no restrictions to education, unlike a 529, where you pay a withdrawal penalty for using funds for other purposes.

Taxed at the child’s rate up to $2,100 in earnings, per year. Subject to Kiddie Tax.

Key Drawbacks of the UGMA and UTMA Accounts

The custodial account does not offer the donor or child any special tax treatment, and you must file and pay taxes on gains each year.

For financial aid purposes, assets in the account calculate as the child’s money, which can reduce financial aid.

Custodians have no control over funds once the account converts to the child’s name.

Non-transferable account. UTMA and UGMA accounts, titled in the child’s name, belong to the child and does not allow you to transfer funds to another child once you establish the account.