If you are looking for more flexibility concerning the fate of your child’s education fund, you may have considered a custodial account. This way, it won’t be necessary to use the money solely for education, and you will enjoy certain tax benefits.
How UGMA and UTMA Accounts Work
UGMA and UTMA accounts are custodial accounts used to protect and preserve assets for minors until they reach the age of majority in their state. Depending on the state, the age of majority may be 18, 21, or even 25 years old.
When Can Beneficiaries Access UGMA and UTMA Accounts?
Once the beneficiary reaches the age of majority, the account becomes theirs. They have full control over the account and can spend the money as they wish.
Potential Disadvantages of UGMA and UTMA Accounts
Although the first $2,300 of income is exempt from high taxes, any funds added thereafter are subject to the parents’ marginal income tax rate. This would not be an issue if the funds were designated for college and held in a 529 plan or Coverdell ESA account.
The account formula also requires the custodian to transfer assets to the child at some point between ages 18 and 25, depending on the state and account.
Not all individuals in late adolescence and early twenties are responsible. While many children will use the money for college or other productive purposes, there is always a risk that the beneficiary may act irresponsibly without parental oversight.
Frequently Asked Questions
Which is better, UGMA/UTMA account or a 529 plan?
What is the right time to start saving for college costs?
How much money should I save for my child’s college education?
Source: The Balance
Source: https://www.thebalancemoney.com/beginners-guide-to-ugma-and-utma-custodial-accounts-4060475
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