Considering Custodial Accounts
The UTMA Option
For parents who do not like the regulations of the 529 and Coverdell Account, check out another option called the Uniform Transfer to Minors Account. The UTMA is a savings account that does not have spending restrictions. The UTMA is a revised version of the Uniform Gift to Minors Act (UGMA) and has been adopted by every state except South Carolina and Virginia, who still employ the UGMA.
The UTMA is an alternative to having minors own stocks, bonds, or mutual funds. Through this account, money is left to minors who will have legal access to the funds once they reach maturation age. Maturation age ranges from 18-21 by state. In the meantime, the child’s custodian oversees the account. During that time, the money can be used to pay for the child’s expenses. Unlike the 529 and the Coverdell, expenses are not restricted to educational expenditures. However, purchases must benefit the child. Acceptable expenses range from camping trips to dance lessons. Essentials such as food, clothing, housing, and medical expenses, are not acceptable.
Once the child takes over the account, there are no spending restrictions. This is great for the kid, but scary for the parent. If you are uneasy about your child’s ability to make responsible financial decisions, this account is not a good option. The account cannot be returned to the giver, and cannot roll over to a sibling’s account.
Cash in a UTMA account is taxable. However, there are small tax incentives. For example, the account has child tax rates. Since children have little to no income, there will be little to no tax. Also, the first $950 dollars earned each year is not taxed for children under 18. The next $950 has a child’s tax rate which is lower than adult rates. When the yearly earnings exceed $1,900 adult tax rates apply. These tax incentives are not as good as the incentives for the Coverdell and 529, however there is no contribution cap so the UTMA has unlimited growth potential.
The UTMA does effect financial aid. Because the UTMA is in the child’s name, it will lower financial aid significantly. It is more efficient to tax the parent’s assets rather than the student’s. Assume that 35% of a child’s assets are put away for college. Only 5.6% of the parent’s assets are used for a child’s education. Therefore this account is a setback when student’s apply for financial aid.
If you do not want spending restrictions like on 529 and Coverdell plans, the UTMA is a good option. Keep in mind that you can set up a 529 or Coverdell account in your name while having an UTMA in your child’s name. Also, UTMA savings can be rolled over to a 529 account with some restrictions. Remember to prioritize your options before committing to a savings strategy.
Last Edited: November 2015
Latest College & Financial Aid News
May 27, 2016
by Susan DutcaOne former and one current DePaul student disrupted a presentation at the school's student center earlier this week. One of them snatched the microphone from the interviewer and appeared to threaten the guest speaker, Milo Yiannopolous, with it. The disturbance was reportedly due to the fundamental disagreement with the subject matter being presented, as it ran counter to that of the protesters [...]
May 24, 2016
by Susan Dutca12-year-old Tanishq Abraham has already earned three associate's degrees and has been accepted to two University of California system four-year colleges. 60 percent of college students today are twice that age before they earn a single bachelor's degree. Tanishq Abraham started taking college courses at age 7 and has been accepted to UC Davis and received the highest honor - a Regents [...]
May 19, 2016
by Susan DutcaNetflix is every college student's delight and distraction. What should've been a two-hour study session ended up being 5 hours of watching Game of Thrones. Apply for one of these Top 10 Scholarships in the time it takes you an episode or two of your favorite TV series. The Scholarships.com "Tell A Friend" $1,000 Sweepstakes Deadline: 6/30/2016 [...]