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How do UTMA accounts work?

Gift a savings account or other financial assets to your beneficiary with this custodial trust.

Give your young loved ones a gift they won’t throw out before the next special event with a UTMA account. Want to learn more? Explore our guide to UTMA accounts and find out what they are and how they’re used.

What is a UTMA account?

A Uniform Transfers to Minors Act (UTMA) account allows an adult to transfer assets to a minor through a custodial account. Here’s how it works:

  1. An adult sets up a UTMA account and makes contributions.
  2. The adult serves as the custodian of the account and has full control until the minor is of age.
  3. The minor gains full access when they reach the age of majority, which is usually 18 or 21 in most states. At that point, they can use the funds however they want.

UTMA vs. UGMA accounts

The main difference between UGMA or UTMA lies in the types of assets you can add to the account. UTMA allows for a broad range of assets, while UGMA limits gifts to purely financial products. The table shows what you can use each account for:

UTMA accountsUGMA accounts
Mutual funds
Gift savings accounts
Life insurance policies
Real estate
Fine art

Whether you choose a UGMA or UTMA account typically depends on the state you live in. Except for South Carolina, most states now offer UTMA accounts exclusively.

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What is a gift savings account?

A gift savings account is a custodial account designed to help you accrue savings for a minor. The account is managed by a custodian — a parent, other relatives or a family friend — who monitors deposits and the balance as it grows. It’s protected until the child reaches 18 years old or your state’s age of majority. At that time, ownership is transferred to the beneficiary, who can then begin withdrawing from it.

These types of accounts fall under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). Benefits differ slightly across the two accounts. But, generally, if you open one of these accounts for a child in your life, you can make it a one-time gift or add to it on birthdays, holidays and other special milestones as they grow.

Family members most often use these accounts as college funds. But the account beneficiary can use the money toward education, starting a new business, a down payment on a house or about any other expense.

Will I get taxed on my UTMA account?

UTMA accounts are subject to some taxes. Withdrawals are tax-free because the account is funded with after-tax dollars. But you could pay taxes on any unearned income that’s accumulated in the account, including interest, capital gains and dividends.

The first $2,100 in interest earned on the account is tax-free if the beneficiary is under 18 or under 24 and a full-time student. Additional interest earned is taxed at the child’s tax rate.

What if the UTMA account was a gift?

The US has a gift tax, which requires you to pay taxes on any monetary gifts over a certain dollar amount. For 2020, that threshold is $15,000. Any yearly contributions to your UTMA account over this limit will be subject to the gift tax.

What are other helpful financial gifts for children?

For financial gifts that aren’t a basic savings account, choose from:

  • A piggy bank. Start younger kids on a solid financial path with a simple piggy bank. By storing their spare change for a rainy-day purchase, you’re more clearly teaching them the cost of the items they desire. And you’re helping them see the power of saving even a few cents a day.
  • A certificate of deposit. If you give a CD as a gift, the child can’t access the money until it matures. You can choose a term that becomes available on a special birthday, like a Sweet 16 or when they start college.
  • A savings bond. Not just for grandparents, a savings bond is a long-term investment that can contribute toward college or a major purchase later in life.
  • A 529 college savings plan. This higher-interest investment product is designed for long-term savings that grow along with your future graduate. Set up a 529 plan through a matching service like CollegeBacker or locally through a plan offered by your state.

Is Christmas the best time to give these gifts?

Savings accounts and other financial gifts for children are for any occasion, including Christmas. A folder of printed numbers may not seem substitute for, say, the latest video game. But savings is a gift that keeps on giving.
Read up on how compare the best accounts to save up for Christmas

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What do I need to open a custodial account?

Requirements vary by bank, so it’s best to contact your financial institution to find out what you’ll need. For most accounts, you’ll have to provide:

  • Your personal information. Including your name, birth date, contact information and Social Security number.
  • The child’s personal information. Including their name, birth date, contact information and Social Security number.
  • ID for yourself and the child. This can include your driver’s license or passport, proof of address and the child’s birth certificate or Social Security card.

Majority of parents give their kids an allowance

If you’re one of the majority of parents (68%) that say they give your kids an allowance, piggy banks are a popular option for kids looking to store those funds.

Bottom line

A custodial trust account is a safe place to safely store and grow monetary gifts that come along with birthdays, graduations and other special occasions. You establish the account’s beneficiary, who learns more about money as the account balance grows. When they reach 18 or your state’s age of majority, they can then withdraw what they need for college and more.

Frequently asked questions

Picture: Shutterstock

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Cassidy Horton is a freelance personal finance copywriter and past contributing writer for Finder. Her writing and banking expertise have been featured in Forbes Advisor, Money, The Balance, Money Under 30,, and other top digital publishers. She holds a BS in public relations and an MBA from Georgia Southern University. See full bio

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