Why UGMA/UTMA Accounts Are the Perfect Holiday Gift

If you have a special child in your life, you may be wondering what to put under the tree this year. One long-lasting and truly meaningful way to show the child in your life that you care is by taking a few minutes to set up a UGMA/UTMA account and give them a leg up in life.

The earlier you open a UGMA or UTMA account for a child, the longer your initial gift has to grow, thanks to the magic of compound interest. For example, investing just $5 a day from birth at an 8% return could make that child a millionaire by the age of 50. By setting up a UGMA/UTMA account, you’re really giving your beneficiary a present that grows all year round. Now, that’s a gift they’re sure to remember!

What is a UGMA/UTMA account?

UGMA is an abbreviation for the Uniform Gifts to Minors Act. And UTMA stands for Uniform Transfers to Minors Act. Both UGMA and UTMA accounts are custodial accounts created for the benefit of a minor (or beneficiary).

The money in a UGMA/UTMA account can be used for educational expenses (like college tuition), along with anything that benefits the child – including housing, transportation, technology, and more. On the other hand, 529 plans can only be used for qualified educational expenses, like summer camps, school uniforms, or private school tuition and fees.

 

It’s important to keep in mind that you cannot use UGMA/UTMA funds to provide the child with items that parents or guardians would be reasonably expected to provide, such as food, shelter, and clothing. Another important point is that when you set up a UGMA/UTMA account, the money is irrevocably transferred to the child, meaning it cannot be returned to the donor.

 

Tax advantages of a UGMA/UTMA account

The contributions you make to a UGMA/UTMA account are not tax-deductible in the year that you make the contribution, and they are subject to gift tax limits. The income that you receive each year from the UGMA/UTMA account does have special tax advantages when compared to income that you would get in a traditional investment account, making it a great tax-advantaged option for you to invest in the child you love.

 

Here’s how that works. In 2020, the first $1,100 of investment income earned in a UGMA/UTMA account may be claimed on the custodian’s’ tax return, tax free. The next $1,100 is then taxed at the child’s (usually much lower) tax rate. Any income in excess of those amounts must be claimed at the custodian’s regular tax rate.

A few things to be aware of with UGMA/UTMA accounts

While there’s no doubt that UGMA/UTMA accounts have several advantages and a place in your overall financial portfolio, there are a few things to consider before you open up a UGMA/UTMA account:

 

  • When the child reaches the age of majority (usually 18 or 21, depending on the specifics of the plan), the money is theirs, without restriction.
  • When the UGMA/UTMA funds are released, they are factored into the minor’s assets.
  • The value of these assets will factor into the minor’s financial aid calculations, and may play a big role in determining if they qualify for certain programs, such as SSDI and Medicaid.

Where you can open a UGMA/UTMA account

Many financial services companies and brokerages offer UGMA or UTMA accounts. One option is the Acorns Early program from Acorns. Acorns Early is a UGMA/UTMA account that is included with the Acorns Family plan, which costs $5 / month. Acorns Early takes 5 minutes to set up, and you can add multiple kids at no extra charge. The Acorns Family plan also includes  Acorns Invest, Later, and Spend so you can manage all of the family’s finances, from one easy app.

 

During a time where many of us are laying low this holiday season due to COVID-19, remember that presents don’t just need to be a material possession your loved one unwraps, and then often forgets about. Give the gift of lasting impact through a UGMA/UTMA account.

The post Why UGMA/UTMA Accounts Are the Perfect Holiday Gift appeared first on MintLife Blog.

Source: mint.intuit.com

Why You Need to Open a UGMA/UTMA Account for Your Kids

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Saving and investing for college expenses may seem overwhelming, but setting aside even small amounts can give your child a head start. While many people are aware of tax-efficient investing accounts like 529 plans, you may not know about UGMA/UTMA accounts – another way to save for educational and other expenses.

In this article, we’ll take a look at UGMA and UTMA custodial accounts, what they are, and how to determine the best way to save for your kids’ future, while getting tax advantages.

What are UGMA and UTMA accounts?

UGMA stands for the Uniform Gifts to Minors Act and UTMA stands for Uniform Transfers to Minors Act. Account-holders are “custodians,” and may transfer money into the account to benefit the minor, but the money is managed by the custodian. Typically the money is released to the minor at the age of majority (usually 21 but sometimes 18 or other ages).

How do UGMA and UTMA accounts differ from 529 plans?

529 plans differ from UGMA/UTMA account in a few key areas:

  • 529 plans can only be used for educational expenses, while UGMA/UTMA accounts can be used for anything that benefits the child. .
  • 529 plans are owned and controlled by the person who created the account – with UTMA/UGMA accounts, the funds are transferred to the beneficiary at the age of majority.
  • Unlike 529 plans, custodial accounts are considered the property of the child, which means that it counts for a higher percentage in financial aid calculations.

The two types of plans share some similarities:

  • Both types of accounts are considered custodial accounts that can be used for the benefit of a minor.
  • Anyone can contribute to either type of account — there are no restrictions based on one’s personal income

If you have a medium to long-term horizon, either a UGMA/UTMA account or a 529 account is usually better than just putting your money in a savings account at a low-interest rate. And don’t forget that it is possible to have both a 529 plan AND a UGMA/UTMA account for the same child.

Why You Need to Open a UGMA/UTMA Account for Your Kids

Unlike with a 529 plan, the funds in a custodial account do not have to be used solely for higher-education expenses. The custodian can withdraw money in a UGMA/UTMA custodial account for any expense that benefits the child, like technology, transportation, housing, or any other expense for the child.

The biggest advantage of UGMA/UTMA custodial accounts is their flexibility. Because they can be used for a wide array of expenses, you can use the money in the account even if your child chooses not to go to college. While earnings do not grow completely tax-free like in a 529 plan, earnings in a UGMA/UTMA account are tax-advantaged, but in a different way.

Depending on how you file your tax return, a guardian can choose to include their child’s unearned income with their own tax return. Unearned income is money that doesn’t come from employment, like from interest or investments. In 2020, the first $1,100 of a child’s unearned income can be claimed on the guardians’ tax return tax-free, and the next $1,100 is taxed at the child’s tax rate, which is likely much lower than their parent’s.

Things to watch out for with UGMA or UTMA accounts

If you’re looking to save money or transfer assets to your kids for a variety of expenses beyond education, a UGMA/UTMA custodial account can make a lot of sense. One thing to watch out for is that a UGMA/UTMA account is tied specifically to one named beneficiary. Unlike a 529 plan, where you can transfer the money in an account to a sibling or other beneficiary, with a UGMA/UTMA account, any unused funds must be used or distributed by the time the child reaches their age of majority or their state’s maximum age for custodial accounts.

Apps like Acorns are making it easy to start a UTMA/UGMA account with their new product, Acorns Early. You can start in under a few minutes and set Recurring Investments starting at $5 a day, week, or month. Fun fact: If you invest $5 a day from birth, considering a 7% average annual market return, you could have more than $70,000 by the time the child turns 18. To learn more, visit Acorns.com/Early.


The post Why You Need to Open a UGMA/UTMA Account for Your Kids appeared first on MintLife Blog.

Source: mint.intuit.com