Susan E. Thomas CPA
Advantages and Disadvantages of Custodial Accounts for College Savings

Uniform Gifts to Minors Act (UGMA)
Uniform Transfers to Minors Act (UTMA)

  • People of all income levels are eligible to open an UGMA/UTMA account
  • You can invest as much as you want in an UGMA/UTMA account--there are no contribution limits
  • Both types of accounts offer a wide variety of investment choices (though an UTMA account generally gives you more options than an UGMA account)
  • When your child is age 181 and older, the investment earnings are taxed at your child's income tax rate, not yours
  • Investment earnings are generally subject to federal and state income tax every year, and the sale of assets may trigger capital gains tax
  • When your child is under age 181, the investment earnings are taxed at your income tax rate, pursuant to the kiddie tax rules
  • Gifts made to an UGMA/UTMA account are irrevocable gifts to your child, and withdrawals from the account can be made only for purposes that directly benefit your child
  • You can't change the beneficiary
  • When the child reaches the age of majority (either 18 or 21, as defined by state law), the child has the right to complete control of the funds
  • The account is treated as an asset of the child for federal financial aid purposes and assessed at a rate of 35 percent (note: this figure will decrease to 20 percent beginning July 1, 2007)
  • When total contributions in 2007 exceed $12,000, or $24,000 for joint gifts, a federal gift tax results
1 The Tax Increase Prevention and Reconciliation Act of 2005 increased the age limit for the kiddie tax rules from 14 to 18, effective January 1, 2006.

Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011