Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA): The Basics
Set up one of these custodial accounts to help pay for college.
The key to maximizing your money for college is to start saving early and investing your college money in the right place. There are several types of savings accounts set up to help you save your money for the long-term, which can help you avoid college financial aid that must be repaid, like college loans.
If you or a younger sibling are under 14, consider a custodial account, like the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). These accounts are set up by parents or grandparents to pay for a student’s college education. Because most states don’t allow adults to give assets to a minor as a gift, they can instead put the money in a trust for the minor.
Custodial accounts like the UGMA and UTMA are the most common types of trusts set up for minors. Read on to learn if these accounts can offer the kind of college funding you’re looking for. UTMA accounts are also able to be funded with real estate, while UGMA accounts are not.
What Are the UGMA and UTMA custodial accounts?
These custodial accounts are set up with financial institutions such as banks, brokerage firms or mutual fund companies. Both the UGMA and UTMA accounts can be funded with cash, stocks and mutual funds.
With these accounts, a donor (usually a parent, legal guardian or grandparent) gives the money to the trust, and the college money is then managed by a custodian on behalf of the future college student. Once the student has reached the age of majority, which varies by state, the money then belongs to the student.
What Are the Benefits of an UGMA or UTMA custodial account?
The UGMA and UTMA are a bit more flexible than other ways to pay for college in that the money does not have to be spent on a college education. Once a student has reached the age of majority, the college funding becomes the student’s property and can be spent on the costs of a college degree or on whatever else the student chooses to spend it on. There are no taxes or penalties if the college money is used on something other than education.
UGMA and UTMA Tips & Tactics
- It is possible to transfer money from an UGMA or UTMA account to a 529 Plan. Learn more about your state’s options for 529 Plans on the College Savings Plan Network website.
- Need a computer or other items to complete your college applications or use within your college program? The custodian of your account can take money from your account for purchases like this.
- The money in your UGMA or UTMA account is considered an asset of the beneficiary. In addition to being taxed, it is factored in to your assets when pursuing college financial aid. In other words, the money in these accounts can impact how much money colleges and universities award you in grants and college loans.
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