529 plans have the tax edge over UTMA and UGMA accounts: "A 529 allows your investments in the plan to grow tax-free, and withdrawals used for tuition, room and board, and other qualified education expenses also are not taxed," says Richard Polimeni, director, Education Savings Programs at Bank of America.
The biggest difference between UGMA and UTMA accounts is that UTMAs allow for more types of assets. While UGMA accounts are typically limited to things you find in most IRAs like stocks, bonds, and mutual funds, UTMAs can also hold things like real estate, art, patents, and even cars.
The main advantage of using an UTMA account is that the money contributed into the account is exempted from paying a gift tax, up to a maximum of $15,000 per year. Moreover, any income earned on the contributed funds is taxed at the tax rate of the minor who is being gifted the funds.
One reason why some families may use an UGMA or UTMA account to save for college is convenience. ... You can use the money in an UGMA or UTMA account for any purpose, not just to pay for college. 529 plan distributions are subject to a 10% tax penalty if you don't use the money to pay for qualified expenses.
“Custodial accounts are considered an asset of the child and are counted against financial aid,” he said. ... But when your child reaches the age of majority - 18 or 21, or even older, depending on the state - you, as the custodian, lose all control over the account.
As the custodian of a UTMA/UGMA account, a parent can withdraw money whenever needed to benefit the child.
Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child's—usually lower—tax rate, rather than the parent's rate. ... Up to $1,050 in earnings tax-free. The next $1,050 is taxable at the child's tax rate. Any earnings over $2,100 are taxed at the parent's rate.
Key Takeaways. Under the Uniform Transfers to Minors Act (UMTA), money deposited into a UTMA account cannot be withdrawn for any reason—except by the child at the appropriate age. In the United States, a child's money does not belong to the child's parents or guardians.
Limits on financial aid.
Student assets in an UGMA or UTMA account reduce eligibility for need-based financial aid by 20% or 25% of the asset value, much more than the maximum 5.64% reduction for a 529 plan account that is owned by a dependent student or the student's parent.
Cons of an UGMA/UTMA Account
A big drawback is that all assets transferred into an UGMA account law are irrevocable transfers. This means that your child owns the assets, and the child has the authority (not the parent) on how to use the funds once the child reaches the age of majority.
There's no limit to the amount you can put into an UGMA/UTMA. But gifts to an individual above $15,000 a year typically require a form to be completed for the IRS.
Any expenditures from an UGMA / UTMA are legally required to be for the benefit of the child and - importantly - not be considered part of parental obligations. Parents are obligated to feed, house and clothe their children. Therefore you cannot use UGMA / UTMA money for food, housing and clothing.
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