Saving for College with Custodial Accounts (UGMA/UTMA)
T. Rowe Price Associates, Inc.
Custodial accounts are also known as UGMA or UTMA (Uniform Gifts to Minors Act
or Uniform Transfers to Minors Act) accounts and are authorized by states to
allow you to give money to a minor while maintaining complete control over the
money until the child reaches the age of majority.
What you should know...
UGMAs or UTMAs have some advantages and some drawbacks. On the plus side, they
are simple to set up and administer. These accounts each have an adult custodian
(you, or whomever you designate) who controls the money — how it is invested and
spent — until the child legally reaches the age of majority. The legal age in
most states is 18 or 21. Some states allow custodianship to extend beyond the
age of majority, and some allow UTMA custodianships to continue to age 25. Some
of the potential drawbacks revolve around asset control and the impact on
financial aid.
Asset Control
One of the potential drawbacks of UGMA/UTMA accounts—gifts and transfers to
minors are irrevocable. Once the money is placed in the UGMA/UTMA donors do lose
an element of control. The funds must be spent to benefit the child and donors
are prohibited from ever taking the money back for other uses or for another
child. When your child reaches the age of majority (age 18 to 25, depending on
the state of residence) the money becomes theirs—to use as he or she sees fit.
Tax Advantages
While UGMA/UTMA accounts can’t match the tax-free benefits of a 529 plan or an
Education Savings Account (ESA), they have some tax advantages. Because money
placed in an UGMA/UTMA account is owned by the child, earnings are generally
taxed at the child’s—usually lower—tax rate rather than the parent’s rate. For
some families, this savings can be significant.
Tax Benefits
Children through age 18:
- Up to $850 in earnings tax-free.
- The next $850 is taxable at 10%.
- Any earnings over $1,700 are taxed at parent's rate.
Investment Flexibility
UGMA/UTMA accounts can be set up in most types of investments. T. Rowe Price is
committed to offering individuals a full range of college savings products,
services, and support they need to meet their investment goals. Investors can
choose from 529 college savings plans, ESA, no-load mutual funds and brokerage
accounts.
Financial Aid
Because the money in a custodial account is your child’s asset and not yours, be
aware that UGMA/UTMA assets can potentially have a significant impact on the
financial aid package the student receives. College financial aid formulas
typically require a student to contribute more of his or her total assets to
college costs each year (up to 35%), whereas parents are expected to contribute
less, sometimes only 5.6% of their total assets per year. Therefore, holding
assets in your child's name in an UGMA/UTMA may decrease the chance of receiving
financial aid.
Consider your Options
UGMA/UTMA accounts used to be one of the only tax-advantaged ways to save for
college. Now you have more college savings choices with the tax-free benefits of
529 plans and Education Savings Accounts. Did you know that if you currently own
a UGMA or UTMA account, you may use it to fund an ESA or 529 plan? However, the
liquidation of the UGMA/UTMA to fund the ESA or 529 plan is a taxable event.
When choosing the right college savings plan, keep in mind that the money in
custodial accounts is an irrevocable gift to the child—she can use the money for
anything she wants. If you want to set aside money for expenses that aren’t
covered by an ESA or 529 plan, an UGMA/UTMA account might be a savings tool for
you to consider.
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