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Must-know facts about UGMA/UTMA custodial accounts

Key takeaways

  • Custodial accounts help adults save and invest money on behalf of a child—until the child reaches a certain age when the account must be transferred to them.
  • Money put into a custodial account is an irrevocable gift to the child the account was established for—the custodian must ensure that it is invested and used for the child's benefit.
  • Between the age of 18 and 25 (it varies by state) legal control of the account must be turned over to the child, who can then use the money for any purpose they choose.

Looking for a convenient way to manage a child's money until they grow up? Whether the money comes from gifts, transferring shares, an inheritance, or earnings, a custodial account is one way to save and invest for a child. Money put into custodial accounts becomes the property of the child and can only be used for their benefit. The state legislation that allows for gifts to children is the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). One or both of those acronyms are often associated with custodial accounts.

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The major advantage of custodial accounts is that they make it easy to give financial gifts to a child. The second related benefit is that you don't have to set up a trust to do it—which can be costly.

Custodial accounts can have some drawbacks though. UGMA/UTMA brokerage accounts are considered assets owned by the child, which can impact financial aid when applying to college. Also, no matter what kind of custodial account, the custodian must transfer the account to the child at a relatively young age (between 18 and 25), after which the money can be used for any purpose.

How custodial accounts work

UGMA/UTMA brokerage accounts are taxable investment accounts with no contribution limits. These accounts offer no tax benefits at the time the contribution is made. A portion (up to $1,250 in 2023) of any earnings from a custodial account may be exempt from federal income tax, and a portion (up to $1,250 in 2023) of any earnings in excess of the exempt amount may be taxed at the child's tax rate, which is generally lower than the parent's tax rate. You're also able to transfer existing shares of stocks, mutual funds, or other securities from your own account into a custodial account. At Fidelity, the UGMA/UTMA brokerage account offers comprehensive trading and a wide range of investments, including stocks, bonds, mutual funds, exchange-traded funds, options, CDs, and more.

Here are the logistical details: The adult custodian opens the account for a specific child. The adult can then add money to the account and choose investments. When the child reaches a certain age (generally between 18 and 25, varying by state), assets and control of the account must be transferred to them.

At some financial institutions, like Fidelity, the account will be restricted once the child passes the state-mandated age and control has not been transferred. Though it is a mandatory process, it has to be initiated by the custodian. If the account was restricted because of a delay in transferring control, any restrictions would be lifted once ownership was transferred.

At Fidelity, you can change your account registration online once the child has turned 18 or reached the age mandated by the state. Custodians will be notified when this process needs to be initiated.

Of course, custodial accounts are not the only way to manage money for a child—a trust could also be established which may allow for more control over when the child can access the money and how it can be used.

Read Viewpoints on Do you need a trust?

There are several other types of custodial accounts.

  • A Roth IRA for Kids allows an adult to save a child's earned money in a retirement account that lets earnings grow tax-free as long as the money stays in the account. If the money is withdrawn before age 59½ without qualifying for an exception, there may be taxes and penalties due. Like all custodial accounts, the child will take control of the account when they reach the specified age in their state. Learn more by reading: Turbocharge your child's retirement with a Roth IRA for Kids
  • A custodial 529 account is very similar to a traditional 529 account. The key difference is that the child on a custodial account cannot be changed. There may be tax advantages when money in a 529 account is used for qualified educational expenses but there may be taxes and penalties due if the money is used for other purposes. For financial aid purposes, custodial 529 accounts are considered parent-owned assets, and have a minimal impact on financial aid calculations. Read Viewpoints on The ABCs of 529 savings plans
  • The Coverdell Education Savings Account (ESA) has a $2,000 annual contribution limit. There is also an income cap which can limit who can contribute to one of these accounts. (Note: Fidelity does not offer this kind of account.)

UGMA/UTMA brokerage account considerations

UGMA/UTMA brokerage accounts can make sense when saving and investing on behalf of a child, but there are some important things to know about the accounts.

Irrevocable gift Money put into a custodial account belongs to the child—it's called an irrevocable gift. At the age mandated by the state, the custodian (often a parent) must transfer control to the child. At that point, they can do whatever they want with the money.

The gift tax may be a consideration There's no limit to the amount you can put into an UGMA/UTMA. But gifts to an individual above $17,000 a year per individual ($34,000 for a married couple) typically require a form to be completed for the IRS. Also, any amount in excess of $17,000 in a year must be counted toward the individual's lifetime gift-tax exclusion limits (the federal lifetime limit is $12.92 million per individual in 2023).

Realized earnings are taxable Earnings are subject to taxes. Income from investments is considered unearned income by the IRS. For children, unearned income above $2,200 is taxed at the rates used for estates and trusts. If interest and dividend income comes to less than $11,000, the parent can include that income on their return.

Little control over how the money is used Once the assets are transferred, the child can use them for any purpose. Each state has different rules for determining when the child must take control of the account.

Financial aid may be impacted Financial aid can be adversely affected by custodial accounts. They are considered assets owned by the child.

Is a custodial account right for me?

When choosing an account, it's important to consider your goals and needs as well as that of the child. There are situations where a custodial account makes a lot of sense and could make planning easier. For instance, if your child inherits or is gifted money, you could use a custodial account to manage the money until they grow up and can manage it on their own. For people who need more control over the money, a preferable alternative could be setting up a trust.

On the other hand, if you are a parent saving your own money for a child's education, a 529 account may make more sense than a custodial 529 or an UGMA/UTMA. That's because 529 accounts offer a greater degree of flexibility and control, as well as tax benefits.

It may be a good idea to consult with your attorney or a tax professional to help choose the best option for your situation. Before opening a custodial account, evaluate your goals, those of the child, and take stock of all your options to make sure that it's the right type of account for you.

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Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.

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The UNIQUE College Investing Plan, U.Fund College Investing Plan, DE529 Education Savings Plan, AZ529, Arizona's Education Savings Plan, and the Connecticut Higher Education Trust (CHET) 529 College Savings Plan - Direct Plan are offered by the state of New Hampshire, MEFA, the state of Delaware, and the state of Arizona with the Arizona State Treasurer's Office as the Plan Administrator and the Arizona State Board of Investment as Plan Trustee, and the Treasurer of the state of Connecticut respectively, and managed by Fidelity Investments.

If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, Arizona or Connecticut resident, you may want to consider, before investing, whether your state or the beneficiary's home state offers its residents a plan with alternate state tax advantages or other state benefits such as financial aid, scholarship funds and protection from creditors.

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Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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