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What are UGMA & UTMA accounts?

Students in a group laughing
Klaus Vedfelt/Getty Images

When it comes to saving for your student's college education, you've probably heard about 529 plans. But did you know other options are available? UGMA and UTMA accounts are designed explicitly for gifting and transferring money to minors. Like 529 plans, they can help you build your savings and maximize your investment in a child's future. Let's take a closer look at these accounts and how they compare with each other and to 529 plans.

UGMA and UTMA accounts involve custodians

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are state laws that outline how securities and assets can be held on behalf of a minor. UGMA and UTMA accounts, like other kinds of custodial accounts, are totally owned by the beneficiary—in this case, the recipient who's going to use it—and reported under their Social Security number. But because the beneficiary is a minor, the account assets are managed on their behalf by an adult (a custodian), usually a family member. While children may own the accounts, they don't gain control of them until they reach legal adulthood as determined by the state, typically age 18 or 21.

One difference between UGMA and UTMA is mainly in what kinds of assets are involved:

  • UGMA accounts can hold financial assets, such as stocks, bonds, cash, mutual funds or exchange-traded funds (ETFs).
  • UTMA accounts can hold financial assets and physical assets, such as art or real estate.

These two kinds of custodial accounts can be an easy way for parents and others to give valuable assets to children while retaining control over those assets for the child's benefit until they are of age.

UGMAs/UTMAs differ from 529 plans in key ways

The main difference between UGMAs/UTMAs and 529 plans is that custodial plans can be used for non-education purposes, whereas the money in a 529 plan can only be used for qualified education-related expenses. (Think K-12 or college tuition, room and board, books and more.) If, hypothetically, your student wanted to take a gap year and travel or spend their "college savings" on something completely unrelated to education, a 529 plan won't let you do that without a hefty penalty.

But the differences don't stop there. Here's a few more to consider:

Tax considerations

Depending on where you live, 529 plans potentially offer state income tax deductions on the money you contribute to the account on behalf of the student. Custodial accounts do not.

However, you might find other tax benefits with UGMA and UTMA accounts. Parents and other adult relatives are allowed to put $16,000 each or up to $32,000 per married couple into a child's custodial account each year tax-free. (Note that any contributions over that amount are subject to the federal gift tax.) Also, any taxes on capital gains or earnings from a custodial account are paid by the recipient—and children are usually in a lower tax bracket than the contributor. Depending on your family's situation, custodial accounts may be a tax-efficient way to help your children save and invest for the future.

Financial aid implications

Generally speaking, a 529 plan will likely have a minimal effect on the amount of financial aid a student receives—helping the financial situation more than hurting it. But that really depends on who owns the plan, timing of withdrawals, and the type of aid your child is applying for. When a child applies for financial aid using the Free Application for Federal Student Aid (FAFSA), any parent-owned 529 or other parental asset may reduce the student's aid package. However, these assets are still calculated at the most favorable rate. That means parents are only expected to contribute a small portion of their assets, so the child is eligible for a sufficient amount of financial aid. Important to note: the FAFSA does not consider assets owned by grandparents—including 529s.

While any reduction is not ideal, UGMA and UTMA accounts are often treated more harshly than 529s. Since they're technically owned by the minor, the FAFSA considers those accounts a student asset and part of their ability to pay for college. Student assets can reduce financial aid packages by a maximum of 20% of the asset's value.

Contribution flexibility

Any contributions you make to a custodial account like UGMAs or UTMAs cannot be changed or revoked and cannot go to any other beneficiary. You're permanently transferring the money, securities or property to the minor. And remember, once the child becomes a legal adult, they can use those assets for anything—not just education. You'll want to make sure you're confident in your child's level of financial responsibility.

Comparatively, 529 plans allow for more flexibility and oversight. Aside from any potential penalties, nothing is making your contributions permanent. As the owner of the 529 plan, you may be able to withdraw part or all of your original investment without incurring taxes (note: the earnings are subject to tax upon withdrawal). And as far as control, you may be able to set up an electronic transfer to the student's college or university directly, bypassing the need to move funds to the child at all.

Should you use UGMA/UTMA accounts or a 529 plan?

Although UGMA and UTMA accounts and 529 plans can be used similarly to save for a student's future, the differences between them are fairly significant. You might want to consider not just using one or the other but both to maximize your savings.

Let's say you've maxed out your tax-deductible contributions to a 529 account. You could put any extra money you wanted to contribute into a custodial account. This allows you to invest on behalf of the child's future expenses in a tax-efficient way—not only for their tuition and books but anything they may need.

Before you open a custodial account, however, it's wise to carefully consider your overall financial picture:

If you're having trouble determining how saving for your child's college education falls into your financial plan, a Thrivent financial advisor can help. Together, you can mindfully consider which plan is right for you and the bright future you imagine for your student.

At Thrivent, 529 college savings are offered through a brokerage arrangement with Thrivent Investment Management Inc.  529 college savings plans are not guaranteed or insured by the FDIC and may lose value.  Consider the investment objectives, risks, charges, and expenses associated before investing. Read the issuers official statement carefully for additional information before investing. Investigate possible state tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary.  Consult with a tax professional to analyze all tax implications prior to investing.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.