Set aside money for your kids with the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) Custodial accounts. These accounts allow you to invest on behalf of your child or children – making investment decisions and withdrawals as needed to cover expenses related directly to them – until they reach legal age of majority in your state. When that happens, control of the assets will generally go to them. 

Key Features

Like other forms of income for minors, these accounts take advantage of the so-called kiddie tax. Each year, a certain amount invested or earned could be federal income tax-free or taxed at the child’s income tax rate, but annual income over a certain amount is taxed at your rate. How much is taxed under the kiddie tax is dependent on the child’s age and whether the income is earned or unearned. Also, be aware that contributing more than $14,000 in a year could trigger tax hikes for you. There are several other important considerations when you’re opening a UGMA or UTMA: 

  • You can withdraw funds early if they’re used to pay for a legitimate benefit of your child. This might include pre-college educational expenses, such as tutoring or private school.
  • These accounts allow investments in typical stock, bonds, ETFs, and mutual funds. 
  • In many states, once the child reaches majority age, the assets belong to them. While you hope they will spend the money wisely (such as on college), there is no requirement on how it is spent. 
  • The money cannot be transferred to other children.
  • These accounts can have a negative impact on a financial aid application, because it’s considered an asset of the child. 
  • If your child already has a high level of income from other sources like investments, the kiddie tax advantage could be negated.
  • Contributions are considered gifts, so even though you may be controlling them, the assets belong to your child.

Suitable For

When you understand how a custodial account works, you can decide if it’s a good fit for you. Here are some key notes:

  • You can withdraw money to pay for legitimate pre-college expenses.
  • The account could lower your taxes in annual investment income and lower your estate through the use of the annual gift tax exclusion.
  • The money in the account can have a negative impact on financial aid applications. 
  • The money goes to your child when they reach legal age and can be used however they wish. 

Eligibility

Age

Any child under age 18 can have a custodial account set up for them by any adult. 

Contributions

There are no contribution limits. However, larger gifts can trigger a taxable event for the contributor. 

Additional Details

This material is provided for general and educational purposes only as many specifics are dependent on state law; it is not intended to provide legal, tax or investment advice.  All investments are subject to risk.  We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.

The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. 

Securities are offered through Voya Financial Advisors, Inc. member SIPC. 

Neither the Voya® family of companies nor its representatives offer tax or legal advice.  Please consult with your tax and legal advisors regarding your individual situation.