Knowing the difference between a UTMA and UGMA account may help you decide how you'd like to begin your child's financial future and what you'd like to invest in.
- UGMA (Uniform Gifts to Minors Act) accounts are custodial investment accounts managed by an adult on behalf of a minor who will have full control once they reach adulthood.
- UTMA (Uniform Transfers to Minors Act) accounts are similar to UGMA accounts except that they may hold a much broader range of financial assets.
- Both types of accounts may be a great way to contribute to a child’s financial well-being or help cover the cost of higher education.
Would you like to help your child to one day go to college, buy a vehicle, afford a home, or give them a head start on life? If so, then a useful tool may be to use either a UGMA or UTMA account.
Both are intended to help minors become financially prepared for the future. However, there are some subtle differences that may make one a better choice for you.
Here's what you need to know about UTMA vs. UGMA accounts and what it could mean for your financial endeavors.
What are UGMA and UTMA Accounts?
A UGMA, or Uniform Gifts to Minors Act, account is a custodial investment account that’s been set up for a minor (i.e., the beneficiary) and managed by an adult (i.e., the custodian). They were created in 1956 as a convenient way for parents and guardians to contribute and invest on behalf of their children without the use of a trust.[1]
Likewise, a UTMA, or Uniform Transfers to Minors Act, account is also a custodial investment account managed by a custodian on behalf of a minor. However, it allows for a wider range of investment options. UTMAs were established in 1986 and intended to be an extension of the UGMA.
How Do UGMA and UTMA Accounts Work?
UGMA and UTMA accounts work as follows:
1) Open an Account
Both UGMA and UTMA accounts must be opened by an adult at any financial institution that offers them. Upon its creation, the adult names the beneficiary and declares which type of account it is (UGMA or UTMA).
The adult may designate themselves as the custodian. However, this is not required. The custodian may be any other trusted adult such as another family member, friend, or even a financial institution.
Note that UTMAs are permitted in all states except South Carolina and Vermont. Meanwhile, UGMAs are allowed in all states.[2]
2) Contribute and Invest
After the account is established, the next step is to fund it. Contributions may be made with after-tax dollars by any adult (parent, grandparent, family friend, etc.). The custodian of the UGMA or UTMA has the authority to invest and manage the contributions as they see fit (within the asset rules of the account type).
There are no IRS limits as to how much an adult may give to a UGMA or UTMA account. However, contributing more than the federal annual gift tax exclusion (currently $19,000 per person as of 2026) will trigger additional reporting to the IRS.[3] Additionally, any assets given are considered irrevocable once deposited into the account.
3) Transfer the Account to the Child
While both UGMA and UTMAs technically belong to the minor, they won't actually have access until they reach adulthood. This age may be different depending on the type of account.
Even though UGMA and UTMAs are often used to cover higher education expenses, this is not a requirement. Upon transfer, the child may use the funds for any purpose they wish.
Key Differences Between UGMA and UTMA
There are a few major areas to consider when comparing UGMA vs UTMA accounts.
| Topic | UGMA | UTMA |
|---|---|---|
| Types of Assets Allowed |
|
|
| Age of Account Handover | A child typically takes full control of a UGMA account when they reach the age of majority in their respective state (typically 18 or 21). | UTMAs typically transfer to a child by age 21 unless the custodian chooses a later date. This may be as late as age 30 in some states, such as Wyoming[4]. |
| Impact on Financial Aid | The FAFSA (Free Application for Federal Student Aid) considers assets owned by the child when assessing financial need. Therefore, a UGMA may inhibit potential grants and scholarship funding. | Similar to a UGMA, UTMAs are also considered by FAFSA and may reduce chances of qualifying for aid. |
Tax Implications
Like many investment accounts, someone is responsible for reporting and paying any taxes that may be incurred. This may be tricky because even though the child is the owner, the account is actually being managed by someone else. Hence, for both UGMA and UTMA accounts, the IRS uses what's known as the kiddie tax rules.
According to IRS Topic No. 553, the kiddie tax applies to unearned income generated within the account (interest, dividends, capital gains, etc.) and is taxed as follows:[5]
- The first $1,350 is tax-free.
- The next $1,350 is taxed at the child's marginal tax rate.
- Anything above $2,700 is taxed at the parents' marginal tax rate.
Other Savings Alternatives
While UTMAs and UGMAs may be very popular, there are other savings tools for minors that you may wish to consider.
529 College Savings Plans
A 529 plan is a state-sponsored investment account intended to help families save for higher education costs. Unlike UTMAs and UGMAs, 529 plans offer tax-deferred investment growth as well as tax-free withdrawals as long as they’re used for educational expenses (tuition, room & board, books, etc.). Any withdrawals used otherwise are subject to normal federal and state income taxes plus a 10% federal penalty tax.
529 accounts may be set up directly with your state’s program or through a major financial institution. You don’t have to necessarily contribute to your state’s plan, but doing so usually results in reducing your state tax bill.
Minor Trusts
Trusts are legal arrangements created to hold and shield assets. While they’re commonly used for business and estate planning purposes, they may also be utilized by families seeking to transfer assets to their children.
Similar to UTMAs, trusts may hold a wide variety of asset types. They also give the grantor (the adult who creates the trust) more control and security over the transfer process. However, trusts may be more complex in nature and expensive to maintain.
Which Account Is Right for Your Family?
There are a lot of similarities between UTMA vs. UGMA accounts. While both are great for growing wealth, you may wish to base your decision upon the types of assets you foresee contributing to the account over your child’s lifetime. Additionally, consider how your state’s age of majority and custodial laws might also affect the account handover process.
Regardless, given the benefits, contributions to either type of account may enhance the beneficiary's financial future. Please consider your options carefully and feel free to reach out to a licensed financial professional for additional guidance.
