If you’re a parent, you may be wondering what the difference is between the two custodial accounts, UTMA and UGMA, that allow you to save as well as transfer financial assets to a minor without the need to establish a trust. UGMA represents the Uniform Gifts to Minors Act, while UTMA stands for the Uniform Transfers to Minors Act.
For example, both account types allow the money to be used for the benefit of the child, and both accounts have a designated adult who is responsible for managing the account until the child reaches 18. However, both of these accounts have a few differences every parent should know.
Read on to learn some of the most important differences between a UGMA and a UTMA account, so that you can make the right choice for your child.
How Do They Work?
UGMA and UTMA accounts do not have to be used for college expenses only. Your child can use the funds for other things, like a car or a house. They’re wonderful alternatives for parents who aren’t exactly sure what their child wants to do after high school graduation.
The money on the account can be utilized for other things without you worrying about tax penalties. But, as much as it is a benefit, this can easily become a disadvantage, especially if your child is irresponsible with money.
The Parents Aren’t the Only Ones Who Can Contribute
Both UGMA and UTMA have no contribution limit. Your children’s grandparents, relatives, and friends may all put a certain amount on the account. After contributing, there are no tax benefits or deductions for anyone who contributed to the account. Keep in mind that the money you give is non-refundable, so once it makes its way into the account, you cannot simply take it back.
You Can Withdraw Funds
While those are technically your kids’ money, as his parents or legal guardians you have unlimited access to them, as long as you have proof they are being used for your child’s benefit. You cannot withdraw funds from the accounts without a good reason, and your access ends once your child becomes legally an adult.
Keep in mind that once you contribute to the account, you cannot easily change your mind and withdraw the funding. It is given to a third party to hold it and grow it over time for your kid, and the only way of withdrawing is with probable cause.
Main Differences Between UGMA and UTMA Accounts
Apart from knowing the ways you can contribute towards both of the accounts, and who is eligible to use them, there is another key difference between UTMA and UGMA accounts. This is directly related to your child’s financial decisions in the future.
UGMA accounts are easier to set up and manage, but they have some drawbacks. For one, the money in the account is considered the child’s asset. That means that if the child gets into financial trouble later on, the money in the account could be at risk.
UTMA accounts, on the other hand, are a bit more complicated to set up, but they offer some important advantages. One is that the money in the account is protected from the child’s creditors. That can be a big help if the child ever runs into financial problems later on.
When Is the Right Time to Set up an Account?
There’s no universal answer to this question since everyone’s circumstances are unique. However, as a general rule of thumb, you may want to consider setting up UGMA or UTMA accounts for your children when they start receiving financial gifts from relatives or other adults. This will help ensure that the money is used for the child’s benefit and not squandered.
Additionally, if you’re planning on using the money for future college expenses, it’s typically best to set up the account sooner rather than later. This will give the funds more time to grow and compound over time. Ultimately, the decision of when to set up a UGMA or UTMA account for your child is one that you’ll need to weigh based on your specific circumstances and financial goals.
Bottom Line
Overall, UTMA accounts offer more flexibility and control to parents since the child cannot spend the money without parental consent. UGMA accounts are simpler but do not offer as much protection for the child’s assets. Base your final choice on which account offers more benefits for your kid, as every situation is different.
Veeramachineni Lalitha
I am Finance Content Writer. I write Personal Finance, banking, investment, and insurance related content for top clients including Kotak Mahindra Bank, Edelweiss, ICICI BANK and IDFC FIRST Bank. My experience details : Linkedin