Is There a Better Alternative to Saving With Custodial Accounts?

Is it still a good idea to put funds away in a UGMA or UTMA account? Today we’ll get to the bottom of this critical question.

Years ago, custodial accounts were created as a means by which parents and guardians could control the savings account of a minor under their care.

There are two different kinds of custodial account, the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA), and both are typically used to save back funds for college or another expense when the minor comes of age.

The idea behind these accounts is that the funds within are a gift from the parent or guardian to the child. With UGMA or UTMA accounts the guardian in control of the account acts as a “gatekeeper” until the child comes of age.

One of the major benefits of custodial accounts is that a portion of the funds within them are able to grow tax-free. Taxes will only be applied at certain thresholds and, even then, the rate will change depending on the amount saved. This factor made UGMA and UTMA accounts extremely popular in the 80s and 90s, but now that tax rates have dropped, the benefits of such accounts are no longer quite so strong.

Also, given that these funds are considered a gift, they cannot be revoked once they’ve been given. Once a child turns 18, or 21, depending on the state, the money is theirs to do with as they please.

With all of this in mind, parents and guardians should realize that there are a number of other ways to save tax-deferred money—custodial accounts are not the only option. The easiest of these options is put funds into specific investments. There are a number of benefits associated with this method, but perhaps the greatest advantage is that it allows you to maintain control of the money. This will protect you against the possibility that your child might spend the funds in a way you didn’t intend or approve of.

The bottom line is this: Many of the benefits of UGMA and UTMA accounts are no longer great enough to outweigh the detriments.

If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.

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