With a UTMA (Uniform Transfers to Minors Act) account, adults can transfer tangible gifts, assets, or funds to minors. So you might be wondering, what’s the purpose of doing all that via an account when you can just hand that to the minor in question?
Time has proven that the younger the individual is, the less capable they are of managing finances. Let’s face it, we all want our children to have a comfortable future and reach all their goals, but to do that you’ll need finances. College tuition are sky high and if you are not setting aside money for your child’s future, it might be detrimental to their future plans and goals.
Let’s take a look at how this account can help you ensure your loved one’s future is safe and secure.
How Do UTMA Accounts Work?
You are probably aware that minors in almost all states in the USA are not allowed to contract. This law prevents minors from enjoying mutual funds, insurance policies, stocks, bonds, and much more. So even though the UTMA account is for your child’s needs, it’s not technically theirs until they reach the age of maturity. It’s a custodial account in which family and friends can contribute to the account for the future of the minor.
There are no contribution limits and anyone can chip in for how much they want. Once the fund or asset contribution is made, the sum of the asset is permanently transferred to the child.
On reaching maturity, the child can use the funds as they wish without any permission or additional requirements.
Who Can Open a UTMA Account?
As long as you are not in South Carolina, UTMA accounts can be easily opened anywhere across the US. You will need to be a US resident and have your social security number ready.
You can open a UTMA account anywhere where there’s a brokerage account option. Or in simple terms, all major banks.
The Benefits of a UTMA Account!
Now that we established what a UTMA account is and how it functions, let’s focus on the main benefits of having a UTMA account for your loved one.
Compared to other types of transfers, UTMA accounts have the fewest. You can easily set up your child for life without paying exorbitant fees. In addition to that, everyone that wants to offer support from close family or friends, they can do so with a UTMA account. However, this is also possible with a 529 plan, which is a tax-advantaged savings plan designed to help pay for education.
Types of savings plans, such as a 529 plan, are basically saving accounts only for the child’s education. This means that all of the pooled funds can only be used for education-related expenses such as tuition, textbooks, notebooks, and so on.
Of course, these restrictions are far greater than the ones of UTMA accounts, and this is the main reason why parents most often opt for UTMA rather than a 529 plan.
The taxes on the UTMA account are at a “kiddie” rate and will enable you to save substantially on tax payments through the whole saving process. Generally speaking, you can enjoy tax exemption if the UTMA account income doesn’t exceed $1,100. If they do exceed that number, there will be a taxation of 10%, which is not that much.
A Small Setback
The benefits of setting up a UTMA account are huge, but there’s one big disadvantage. Since the child is now the owner of all the transferred assets, they might have a harder time securing financial aid.
However, this won’t be a big problem if the UTMA account is properly maintained for years and the child can comfortably fund the whole tuition.
Setting up a UTMA account for your child’s future is one of the best decisions you can make. While there are other options, this type of account ensures that your child reaps the most benefits and has a secure future.
This type of account won’t just serve for education-related expenses, but the child can spend the funds as they see fit. On the other hand, 529 plans are very limiting and not that versatile. That being said, no one knows what the future holds, but being prepared is always the best course of action.