 | Advantages and Disadvantages of Custodial Accounts for College Savings
Uniform Gifts to Minors Act (UGMA)
Uniform Transfers to Minors Act (UTMA)
Advantages
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- 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
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Disadvantages
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- 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
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