UTMA Account

Whether you’re saving for college or just trying to set aside some money for your children or grandchildren, you have several options to consider. One common way people save for minor children is via something known as a Uniform Transfers to Minors Act (UTMA) account.  

A UTMA account can help you build your child’s financial foundation. Here’s a more detailed explanation of how it works.  

Uniform Transfers to Minors Act 

The Uniform Transfers to Minors Act came about in 1986 as an extension of the Uniform Gifts to Minors Act (UGMA), which is another type of account that can be set up on behalf of a minor child. The latter was introduced in 1956 as a way for adults to gift cash and securities to children.  

What is a UTMA account? 

A UTMA account is a custodial account in which an adult manages the funds on behalf of the child until that child reaches the state’s age of majority (usually somewhere between ages 18 to 21). Once the child reaches the age of majority, he or she takes over and has full access to the assets in the account. 

How do UTMA accounts work? 

Many financial institutions and brokerages offer this type of custodial account. They’ll typically ask for the child’s birthday, Social Security number and other identifying information to get started. You’ll likely have to make an opening deposit as well, which usually ranges from $500 to $2,000. While a UTMA account is common among parents, guardians and grandparents, anyone can open one and name a beneficiary.  

Once the account is up and running, the custodian manages it on behalf of the minor. This includes making investment decisions and carrying out transactions. Meanwhile, anyone can gift financial assets to the beneficiary. Any contribution made to this type of account is irrevocable. The custodian is permitted to take out funds along the way, as long as they’re used to benefit the child — to purchase a car for a teenager, for example. 
 

However, it’s important to understand what funds can and can’t be used for. That’s because the custodian has a fiduciary duty to act in the minor’s financial best interest. 

What assets does a UTMA account include?

State rules may vary, but a UTMA account can typically hold the following assets: 

• Cash 
• Stocks 
• Bonds 
• Mutual funds 
• Exchange-traded funds (ETFs) 
• Cars 
• Real estate 
• Art 
• Jewelry  
• Intellectual property 
• Annuities  
• Life insurance policies  

UTMA account vs. UGMA account

While UTMAs and UGMAs are very similar, there is one key difference. In addition to all the assets a UGMA account covers, a UTMA account allows for other types of tangible and intangible gifts. In other words, it can hold a wider range of financial assets.

UTMA vs. 529 plan

When saving for college, many people turn to a 529 savings plan. These accounts offer tax benefits so long as the funds are used to pay for qualified education expenses. UTMAs are sometimes also used for college savings, though they don’t offer the same tax benefits as a 529 does. Moreover, the funds in a UTMA don’t necessarily have to be used for college. They can be used for anything to benefit the child, and once the child gains control of the account, he or she can use the funds in any way. 

Pros and cons of a UTMA account 

Pros

• They’re simple to open. 
• They provide access to a wide range of assets. 
• Each person who contributes can gift up to $17,000 in 2023 without tax consequences. 
• A portion of UTMA funds are taxed at the child’s tax rate, which is probably lower than their parents’ rate. 
• Upon coming of age, the beneficiary can use UTMA funds for anything he or she likes. 

Cons

• You cannot change the beneficiary of a UTMA account. 
• States’ 529 savings plans generally offer better tax benefits so long as the funds are used for qualified education expenses. 
• UTMA account funds could affect the beneficiary’s ability to receive financial aid. 

Is a UTMA account right for your financial plan?

A UTMA account can be a straightforward way to save for college and other future expenses. They’re simple to open and can hold all sorts of assets. They can also be a low-cost alternative to opening a trust. They don’t offer the same tax breaks as a 529 savings plan, but the beneficiary will eventually enjoy penalty-free withdrawals and can use the funds for any purpose.  

Personalized financial planning can prove useful when exploring a UTMA account. A financial advisor can get to know you and help you decide if a UTMA account makes sense for your situation. An advisor can also show you how the decision to open a UTMA account might impact your larger financial plan. 

This publication is provided for informational purposes only and should not be interpreted as financial, tax, or legal advice. Northwestern Mutual and its representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation. All investments carry some level of risk, including the potential loss of principal invested.