Why You Need To Open A UTMA Account For Your Kids
June 22 2022 - 6:40AM
Finscreener.org
Saving for college fees may be
daunting, but being able to save even tiny amounts throughout the
years may give your child a good head start when their college time
arrives. Although many people are aware of tax-advantaged
investment accounts such as 529
plans, you may be unaware
of the existence of UGMA/UTMA accounts, an additional avenue to
save for school and other expenditures.
In this post, weU+02019ll look at
UGMA and UTMA custodian accounts, what they are, and how to figure
out the best approach to invest for your childrenU+02019s future
while receiving tax benefits.
Many financial institutions will
allow the funding of these types of accounts it is as simple as
opening a bank account. This could be at a local bank or a
significant financial institutions like Fidelity
(NYSE:
FNF), TD Ameritrade (NASDAQ:
AMTD), Charles Schwab (NYSE:
SCHW), etc.
What Is The Difference
Between UGMA And UTMA Accounts?
The Uniform Gifts to Minors Act
is abbreviated as UGMA, and the Uniform Transfers to Minors Act is
abbreviated as UTMA. Both UGMA and
UTMA account holders are "custodians," and while they may send
money into the account for the benefit of the minor, the money is
handled solely by the custodian. Typically, the money is released
to the child when they reach the age of maturity.
What Distinguishes UGMA And UTMA Accounts From 529
Plans?
In a few crucial ways,
529 plans differ from UGMA/UTMA
accounts:
- UGMA/UTMA funds can be used for anything that
helps the kid, whereas 529 plans can be used only for educational
expenditures.
- The individual who started the account owns and
controls the 529 plan with UTMA/UGMA accounts, the money is passed
to the recipient at the age of majority.
- Custodial funds, unlike 529 plans, are
considered the childU+02019s property, which means they count for a
larger proportion in financial assistance
calculations.
Some parallels exist between the
two types of plans:
- Both sorts of accounts are custodial accounts,
which can be utilized to benefit a child.
- Anybody can contribute to either account type
there are no income-based limits.
If you have a medium to long-term
view, a UGMA/UTMA account or a 529 account is typically preferable
to placing your money in a low-interest savings account. Remember
that you can have both a 529 plan and a UGMA/UTMA account for the
same kid.
Why You Should Open A
UGMA/UTMA Account For Your Children
Unlike a 529 plan, funds in a
custodial account are not required to be utilized only for
higher-education costs. The custodian has the authority to withdraw
funds from a UGMA/UTMA custodial fund for any expenditure that
benefits the kid, such as technology, transport, accommodation, or
any other expense for the child.
The most significant advantage of
UGMA/UTMA custodial accounts is their adaptability. You may utilize
the money in the bank even if your child does not choose to attend
college because it can be used for a variety of costs. While
profits in a UGMA/UTMA account are not tax-free like in a 529 plan,
they are tax-advantaged differently.
A guardian can opt to include
their childU+02019s unearned wealth with their own tax return,
based on how you file your tax return. Unearned revenue is income
that does not come from work, such as interest or investments. In
2020, the first $1,100 of a childU+02019s unearned income can be
claimed tax-free on the guardiansU+02019 tax return, with the
remaining $1,100 taxed at the childU+02019s tax rate, which is
likely to be significantly lower than their
parentU+02019s.
UGMA/UTMA Accounts Can Help With College
Expenses
One of the biggest benefits of
opening a UGMA/UTMA account is that it allows parents to save money
for their
childrenU+02019s
education without paying
taxes on capital gains. If you open an investment account for your
child and fill it with stocks or bonds, there will be no tax consequences if
you sell those investments once your child turns 18 and uses them
toward college expenses.
The only catch is that
withdrawals made by your child must be used exclusively for
qualified higher education expenses such as tuition, fees, books,
and room and board at an eligible educational institution under
Section 529 plans.
Things To Be Aware Of
While Dealing With UGMA Or UTMA
Accounts
A UGMA/UTMA custodial account
might make a lot of sense if you want to save funds or transfer
assets to your children for a range of expenditures other than
schooling. One thing to keep in mind is that a UGMA/UTMA account is
only linked to one identified beneficiary. Unlike a 529 plan, in
which you can transfer assets to a sibling or other beneficiary,
any unused funds in a UGMA/UTMA account must be spent or dispersed
by the time the kid reaches the age of majority or their
stateU+02019s limit age for custodial
accounts.
Final
Thoughts
Investing in stocks, bonds, and
mutual funds is a great way to build wealth, but there are other
ways too. UTMA accounts are a good way to save for childrenU+02019s
future education, particularly if you plan to send them to a
private school or college. Use it wisely, though savings for
college can be used for more than tuition, including books and
supplies, room and board, and even studying abroad.
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