How To Make Your Child Rich Through a UTMA Account
- A Uniform Transfers to Minors Act (UTMA) is a bank account that allows a minor to receive various assets.
- These assets will stay in the account, controlled by a custodian, until the minor turns legal age of 18 or 21, depending on their state of residency.
- The money saved will help the minor pay for their post-secondary education.
Providing financial stability for their children is typically the main priority for parents; especially, as children start approaching a certain age where they can fully understand how to utilize their assets and funds best. However, choosing what type of account would best benefit your child’s future can be challenging.
Several financial accounts are strategically designed to assist parents in investing in their children’s future college savings plans and financial stability. Some of these accounts include 529 Plan, life insurance policies, custodial IRA, Uniform Gifts to Minors Act (UGMA), and UTMA.
As you choose the correct account, many factors need to be considered. A few of these factors are when the child will receive full access to the account, the amount of money you desire to be there when they reach the age of maturity, and how opening this type of account will affect them after they become an adult. For example, a popular financial account that parents use is UTMA’s. Keep reading to learn about UTMA’s and how this account can benefit your children’s future.
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What is a UTMA Account?
A Uniform Transfers to Minors Act (UTMA) is a tax-advantaged bank account that allows a minor to receive various assets, ranging from property to fine art. Similar to a UGMA account, this type of account also has a custodian who oversees this account until the minor reaches the age of maturity, which is determined by the account holder’s respective state.
A UTMA account offers parents and other contributors to aid a minor in developing a tax-free savings account. The minor could then use the money for various purposes once they become of age, typically between 18-25. Still, the age number is based on the state’s rules and regulations regarding the UTMA account.
Main Difference Between a UGMA and a UTMA Account
Although these two accounts have a similar name, one main difference sets them apart: contributions.
For both a UGMA and UTMA account, the annual contribution limit in 2021 per child is $15,000.
However, there are a couple of differences regarding what can be contributed to a child’s UTMA and UGMA accounts. First, for a UTMA account, the parents and other contributors can add any type of assets, such as stocks, bonds, art, and other financial and physical assets. The greater range allows the child to receive varying returns on their financial assets, which diversifies their risk and maximizes their potential for profit.
However, for a UGMA account, the same range is not available to contributors when putting away financial assets for the minor. For a UGMA account, the contributions are limited to only financial assets, making the UTMA account more appealing to those contributors who wish to give their kids a variety of assets.
Benefits of a UTMA Account
When thinking of investing in a UTMA account for your child, the following reasons will help you better understand the benefits of a UTMA account.
There are fewer restrictions regarding a UTMA account, making it easier and more convenient for people to transfer different types of assets into the minor’s account. Furthermore, the variety of assets placed into the UTMA account will help diversify the account’s risk and hopefully produce a more stable financial return over time.
Age of Maturity
Some states allow the custodian of the UTMA account to choose an age of majority up to 25 years old where the funds within the account would then be released to the minor. This benefit is a crucial advantage that the UGMA does not offer; choosing to increase the maturity age allows the recipient to gain some experience in the real world and become financially responsible, reducing their risk of blowing through their money on unnecessary expenses.
What Are The Disadvantages of a UTMA Account?
Cannot Apply for Financial Aid
The main disadvantage of a UTMA account is that if the UTMA account recipient decides to pursue post-secondary education at an accredited college, they will be unable to apply for regular financial aid to accommodate the educational expenses. Although the UTMA recipient may not meet the requirements for regular financial aid, there are different college grants they can still qualify for.
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However, with the numerous assets saved up within the UTMA account, paying for tuition will be much easier, and the minor will not have to worry about ending up with large amounts of student debt.
Gains on Investments Are Taxed
As mentioned above, the funds added to the UTMA are tax-free. However, as the money in the account can be invested in many different financial securities, such as stocks, bonds, and mutual funds, the net gain on these investments is tax-free up to $1,100. However, once the capital gains surpass $1,100, the next $1,100 will be taxed at the child’s tax rate of 10%, and anything above that is taxed at the parent’s highest marginal tax rate.
The benefits of a UTMA account outweigh its disadvantages because the assets placed under the minor’s name will be more valuable and resourceful than applying for student loans that will take years to pay back.
Have you or would you invest in a UTMA account for your child? Why? Let us know in the comments below.
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