Home > Financial Aid > College Savings Accounts > Considering Custodial Accounts

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.

UTMA

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.

Latest College & Financial Aid News

Biggest / Largest Dollar Scholarships in 2020

January 16, 2020

by Susan Dutca-Lovell

When it comes to large dollar scholarships, mo' money means fewer problems in paying your college tuition bill. The average student will land between $1,000 and $5,000 in college scholarships after investing a decent amount of time and effort into applying for scholarships. Even smaller scholarships worth $500 are enough to cover books and fees, even if they aren't enough to foot an entire semester’s college tuition bill. [...]

Gap Year for National Service as a College Graduation Requirement?

January 13, 2020

by Susan Dutca-Lovell

Should students be required to and serve their nation either before or during college? Pete Buttigieg thinks so, as he has rolled out a $20-billion proposal to enlist young people in national service after high school in order to produce "civically informed and dedicated Americans." In his commentary, Why Colleges Should Require a Gap Year, Jonathan Zimmeran outlines why a gap-year would be the ideal timeline for this initiative. [...]

20 Scholarships for High School Seniors Class of 2020

January 8, 2020

by Susan Dutca-Lovell

High school graduation is right around the corner for high school seniors class of 2020 and - while many students may have already committed to their dream colleges - securing college financial aid is still a top-of-the-list priority in bringing that dream to fruition. Luckily, right now is the scholarship application peak season, with just enough time to apply for and win scholarships for college. Many 2020 scholarship deadlines are within the next several months, giving students like you sufficient time to conduct a free scholarship search and apply for those that best suit and interest you. Here's a sneak peek of the many scholarships for high school seniors class of 2020: [...]

Last Reviewed: January 2020