UGMA vs. UTMA accounts explained: Benefits & setup guide

Helping your kids—or grandkids—with education costs can be one of the most impactful investments you can make in their future. Establishing a dedicated college savings account can be a great way to show your commitment to their long-term success.

While 529 college savings plans are a popular tool to invest on a child's behalf, they're not the only option to consider. In this article, we explore UGMA and UTMA custodial accounts. While the tax benefits aren't as generous as 529 plans, these custodial accounts can be used for a wider range of needs.

We'll cover features of UGMA vs. UTMA accounts and how they stack up against each other as well as how they differ from 529 plans.

UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfers to Minors Act) investment accounts provide a way for parents and other family members to help children save for future financial needs. While the child is the sole owner and beneficiary of these accounts, an adult custodian manages the account assets on their behalf. The beneficiary gains control of the accounts when they reach the legal age of majority as determined by state law—typically 18 or 21.

While there are differences in what kinds of assets can be held in each type of account, UGMAs and UTMAs function similarly. For example, both are taxable investment accounts that have no contribution limits. Once assets are transferred into either account, the gift is irrevocable. The family member cannot reclaim the assets because they instantly belong to the child.

The federal laws that govern UGMA and UTMA accounts contain specific rules about how these investment vehicles operate. Here are some of the basic guidelines to know when you're creating or contributing to one of these accounts:

Any adult can open a UGMA or UTMA account at any bank, brokerage firm or mutual fund company that offers them. They'll need to specify a beneficiary who's a minor—as well as a custodian for the account.

The custodian manages the account. This includes making investment choices, even though the child owns the assets. The custodian only can withdraw funds from the UGMA or UTMA if doing so directly benefits the child.

Anyone—including parents, grandparents, other relatives and friends—can contribute to a UGMA or UTMA account. There's no annual limit on the amount you can put into the account. However, contributions greater than $18,000 in 2024 from an individual (or $36,000 for married couples) will count against their lifetime gift tax exemption.

The custodian must transfer control of the account to the beneficiary when they reach legal adulthood according to state law where the UGMA or UTMA account was created. Typically, it's age 18 or 21, although in some states and situations, custodianship can be extended up to age 25 or 30.

UGMA and UTMA accounts have similar rules. The most notable difference is what assets you're allowed to hold in the account:

• UGMA accounts can hold financial assets, such as cash, stocks, bonds, mutual funds and exchange-traded funds (ETFs).
• UTMA accounts can hold both financial assets and physical assets, such as art, jewelry or real estate. UTMA accounts also allow other transfers, such as payment of debts owed by a third party to a minor and transfers of property from trusts or estates.

Another key distinction is which states recognize the accounts. While custodial accounts were created by two pieces of federal legislation—the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act—individual states can choose whether to adopt them. All 50 states recognize UGMA accounts, but Vermont and South Carolina have not adopted UTMA accounts.

The "kiddie tax" applies to any investment accounts, including UGMAs and UTMAs, owned by individuals younger than 18—or age 24, if a full-time student. In 2024, the first $1,300 in earnings is tax-free, while the second $1,300 is taxed at the child's rate; any investment earnings beyond that are subject to the parent's marginal tax rate.

Discover more college savings plan options

There's no such thing as being too early to the table with a college savings plan. Opening an account is right there on the timeline along with buying a crib and a car seat. And, in a best-case scenario, you’ll gain some tax advantages while saving.

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With college costs representing a major financial hurdle for many families, 529 education plans are a common way that parents can help save for their children. Here's a look at how custodial accounts and 529 plans compare.

Neither 529 plans nor custodial accounts have annual contribution limits. However, for both types of accounts, the amount you contribute counts toward your annual gift tax exclusion. That means you have to report contributions exceeding $18,000 from an individual (or $36,000 for married couples), which will count against your lifetime gift tax exemption.

Unlike custodial accounts, 529 plans have an aggregate contribution limit—the total amount you can put into the account. The 529 contribution caps are set by each state and range from $235,000 to $575,000. If your account balance reaches the cap determined by your state, you won’t be able to make further contributions until your balance falls under that amount.

When it comes to saving on taxes, 529 plans generally have the edge. Your contributions grow on a tax-deferred basis, and any money you withdraw for qualified college expenses, as well as K-12 school costs, is tax-free at the state and federal levels. In addition, several states offer income tax breaks on 529 contributions, effectively increasing the amount you can put into these accounts.

By contrast, investment earnings from a custodial account are subject to tax in the year they're realized. That means you may owe taxes on dividends and interest income each year, even if you didn't sell any shares. The kiddie tax provides favorable treatment compared to assets held in the parent's name, but only up to the annual threshold, which is adjusted each year for inflation.

College savings plans offer a limited menu of investment choices, which often include mutual fund or exchange-traded fund (ETF) portfolios tailored to your risk tolerance. Some states also offer target-date funds that automatically adjust your holdings—that is, move toward more conservative assets—as your child ages.

Custodial accounts allow a much wider range of options, including the ability to own individual stocks and bonds. If allowed by the custodian, an UTMA even may allow you to hold collectibles such as artwork, antiques and rare coins, among other assets.

Generally speaking, a parent-owned 529 plan will have a minimal effect on the amount of financial aid a student receives. Only a small fraction of the parents' assets, 5.64%, are factored into the amount of federal aid your child receives.

UGMA and UTMA accounts often are treated more harshly than 529s, which is another reason they may not represent the best choice for college savings. Financial aid departments consider custodial accounts a student asset and part of their ability to pay for college. Student assets can reduce financial aid packages by up to 20% of the asset's value.