With UTMA accounts, adults can transfer tangible gifts, assets, or funds to children to help them in the future. But you might be thinking, what’s the purpose of having an account of this type when you can just hand the assets to the kid when you feel like it?
Time and time again, this method of gifting has proven to us that minors are not the best asset and money managers. So, opening a custodial account where family and friends can contribute is the way to go.
This type of account can serve to help with college funding and enable the child to have a bright and stable future. But there are a lot of other reasons why you should open a UTMA account for your child.
How UTMA accounts work
If you are a US resident, you are probably aware that in almost all states, minors are not allowed to sign contracts. This type of law prevents minors from joining mutual funds, obtaining insurance policies, and investing in stocks, among other things.
While this is not entirely a bad thing, minors should not focus on analyzing the market index but on education. Still, children have needs, and those needs will only expand as they grow. When they reach finish high school, it’s highly likely that they will want to continue with the pursuit of higher education. But we all know how expensive college tuition can get, and if you are not prepared for that, your child might not realize its full potential, education-wise.
A UTMA account is custodial and technically, it’s not your child’s; they will become the owner of the account once they reach the age of maturity. After they reach that point in their life, they are free to do with the assets and funds as they wish without any restrictions or requirements. And most of the time, the funds will be used for college tuition and other school-related expenses.
Can you open a UTMA account?
As long as you are not in the state of South Carolina, you can open a UTMA account anywhere in the US. You will need to provide the bank with proof of citizenship and your social security number.
UTMA accounts can be opened anywhere where banks offer brokerage account options. Or, in other words, all major banks in the US.
The major benefits of opening a UTMA account
There are numerous benefits to opening a UTMA account for your child:
The taxes that might come with UTMA accounts are at a “kiddie rate.” That being said, you will only have to pay taxes if your UTMA account income from funds exceeds more than $1100. Still, a 10% taxation rate shouldn’t stop you from securing your child’s future.
Anyone can contribute to the UTMA account, including family and friends, without a set limit to how much they can contribute. You can easily set your child for life without paying exorbitant fees each time you make a transaction.
There’s an alternative to UTMA, however, but it serves to fund only school-related expenses. That alternative is the 529 plan which is tax-advantaged. However, with this plan, there are a lot of restrictions on how your child can spend the money.
Speaking of 529 plans and their restrictions, while they can only be used to fund schooling, the UTMA account’s pooled funds can be used for stock investments, real estate purchases, and so much more.
This is the main reason why UTMA accounts are far more popular than 529 plans, despite them being tax-advantaged.
A small but significant setback
UTMA accounts might stand in the way of your child securing financial aid in the future. For instance, they might have a harder time obtaining funds and grants through the Federal Student Aid (FSA).
But it goes without saying that if the UTMA account is properly maintained for years, the child can comfortably fund their own tuition.
By now, you ought to know all the reasons why you should start a UTMA account for your child. They are easy to open, and the benefits they bring your child will appreciate once the time is right. Having the ability to set your child for life before they even start talking is a serious blessing.
If you are a dedicated and loving parent, look into UTMA accounts or even 529 plans.