If you have a special child in your life, you may be wondering what to put under the tree this year. A permanent and really meaningful way to show the child in your life that you care is to take a few minutes to set up a UGMA / UTMA account and give them a leg up in life.
The sooner you open a UGMA or UTMA account for a child, the longer your original gift will have to grow thanks to the magic of compound interest. For example, if you invest only $ 5 a day from birth with a return of 8%, that kid will become a millionaire by the age of 50. When you set up a UGMA / UTMA account, you are truly giving your beneficiary a gift that will grow all year round. This is a gift that you will surely remember!
What is a UGMA / UTMA account?
UGMA is an abbreviation for the law on uniform gifts to minors. And UTMA stands for Uniform Transfers to Minors Act. Both UGMA and UTMA accounts are deposit accounts created for the benefit of a minor (or beneficiary).
The money in a UGMA / UTMA account can be used for education expenses (like tuition fees) along with anything that benefits the child – including housing, transportation, technology, and more. On the other hand, 529 plans can only be used for qualified educational expenses like summer camps, school uniforms, or private school tuition and fees.
It is important to note that you will not be able to use UGMA / UTMA funds to provide the child with items that are reasonably expected by parents or guardians, such as: B. Food, shelter and clothing. Another important point is that when you set up a UGMA / UTMA account, the money is irrevocably transferred to the child, which means that it cannot be returned to the donor.
Tax benefits of a UGMA / UTMA account
The contributions you make to a UGMA / UTMA account are not tax deductible in the year in which you make the contribution and are subject to gift tax restrictions. The income you receive from the UGMA / UTMA account each year has special tax advantages compared to the income you would earn on a traditional investment account. This makes it a great tax-efficient option for you to invest in the child you love.
How it works In 2020, the first USD 1,100 in investment income generated on a UGMA / UTMA account can be claimed in the custodian bank's tax return. The next $ 1,100 will then be taxed at the child's tax rate (usually much lower). Income in excess of these amounts must be reported at the regular tax rate of the custodian.
Some things to consider with UGMA / UTMA accounts
While there is no doubt that UGMA / UTMA accounts have multiple benefits and a place in your overall financial portfolio, there are a few things to consider before opening a UGMA / UTMA account:
When the child reaches the majority age (usually 18 or 21, depending on the details of the plan), the money is theirs without limitation.
When the UGMA / UTMA funds are released, they will be included in the minor's assets.
The value of these assets is taken into account when calculating the minor's financial assistance and can play an important role in determining whether they are eligible for certain programs such as SSDI and Medicaid.
Here you can open a UGMA / UTMA account
Many financial services companies and brokers offer UGMA or UTMA accounts. One option is Acorns' Acorns Early Program. Acorns Early is a UGMA / UTMA account that is included on the Acorns Family plan and costs $ 5 / month. Acorns Early takes 5 minutes to set up, and you can add multiple children at no extra charge. The Acorns Family plan also includes Acorns Invest, Later, and Spend, so you can manage all of the family's finances through one simple app.
At a time when many of us are on the ground due to COVID-19 this holiday season, remember that gifts don't have to be just a material possession that your loved one unpacks and then often forgets. Give away a lasting effect through a UGMA / UTMA account.
Dan Miller (41 posts)
Dan Miller is a freelance writer and founder of PointsWithACrew.com, a website that helps families travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 children.