UTMA & UGMA Accounts

If you want an investment account that offers the most freedom for your future, the UTMA or UGMA is likely your best starting point. These are the most popular "general purpose" investment accounts for young people because they don't have strict rules on how you must spend the money later.

What is the Difference?

While they are very similar, the main difference is what can be held inside the account:

  • UGMA (Uniform Gifts to Minors Act): The original version. It is limited to financial assets like cash, stocks, bonds, and mutual funds. It is available in all 50 states.

  • UTMA (Uniform Transfers to Minors Act): A newer version. It can hold everything a UGMA does, plus physical property like real estate, vehicles, fine art, or patents. Note: UTMA is currently available in almost all states except South Carolina and Vermont.

Essential Facts for You and Your Parents

To be fully informed, you and your parents should review these four key areas together before opening an account:

1. The Ownership Rule

Once money or assets are deposited into a UTMA/UGMA, they are considered an irrevocable gift. This means the minor is the legal owner. Even though a parent (the custodian) manages the investments, they cannot legally take the money back or use it for their own expenses.

2. When You Take Control

You do not manage the account alone until you reach the "Age of Majority." This age is determined by your state's laws.

  • In many states, this is 18 or 21.

  • Some states allow the adult to set the age as high as 25 when the account is first opened.

  • You and your parents should check your specific state's rules so you both know exactly when the transfer of control will happen.

3. Tax Responsibilities

Because the minor owns the account, the tax bill is usually lower, but it is not zero.

  • Tax-Free Limit: Typically, the first portion of earnings (like dividends or capital gains) each year is tax-free.

  • Minor's Rate: The next portion is taxed at your (the minor's) lower tax rate.

  • The "Kiddie Tax": If the account earns a significant amount of profit, anything above a certain limit (usually around $2,700 for 2026) is taxed at the parent’s higher tax rate.

4. Impact on College Aid

When applying for college, the government looks at who owns the money. Because a UTMA/UGMA is a student-owned asset, it is weighted more heavily (around 20%) than a parent-owned asset (around 5.6%) when calculating financial aid. This means having a large UTMA account could reduce the amount of financial aid you receive.

Things to talk about together:

  • Your Goals: Are you saving for a first car, a house, or a business? Knowing the goal helps decide how to invest.

  • The Platform: Research which brokerage offers the best tools for you. Look for $0 commissions and fractional shares so you can start small.

  • The Strategy: Decide if you want to pick individual stocks together or use "Index Funds" to own a little bit of many different companies at once.