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Using UGMA/UTMA accounts







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Using UGMA/UTMA accounts

UGMA/UTMA accounts are custodial accounts you may use to save for your child's college education. Contributions to the account to pay for future higher education expenses are exempt from gift taxes as long as no more than $15,000 (in 2021) is contributed by a single donor to a single child.

If the child is under 18 or a full-time student age 19-23, the first $1,100 (in 2021) in earnings on an UGMA/UTMA account is tax-free. The next $1,100 is taxed at the child's tax rate. At higher levels, earnings on the account are taxed at the parents' highest marginal income tax rate.



The following table shows the future value of monthly contributions to a tax-exempt account. (Keep in mind that the earnings -- not the contributions -- to an UGMA/UTMA account are taxable. After the child turns 18 or 24 if a full-time student, the earnings are taxed at the child's tax rate.)

For example, if you contribute $250 monthly, invested at 6%, the future value in 18 years is $97,322:

Monthly Amounts6.0%8.0%10.0%
$100$38,929$48,329$60,557
$250$97,322$120,822$151,392

Financial professionals may recommend that you buy growth stocks or mutual funds that invest in growth stocks for UGMA/UTMA accounts. Since growth stocks usually don't pay dividends, the account grows instead by earning capital gains. Capital gains earned over a period of more than one year are taxed at a lower rate than ordinary income. The long-term capital gains tax rates are 0%, 15% and 20% for 2021.

There are two major drawbacks to using UGMA/UTMA accounts:

  • Impact on applying for student financial aid. The expected-family contribution formula used to calculate a child's eligibility for financial aid assigns a greater weight to assets held in UGMA/UTMA accounts. This is because these accounts are considered the child's assets.

  • Loss of control of assets. Since UGMA/UTMA accounts are considered the child's assets, the child gains control of them when they reach age 18 or 21, depending on the state.
For more information, see IRS Pub. 929: "Tax Rules for Children and Dependents."

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Next, we'll take a look at the major types of student loans and rules for deducting interest on those loans.


Next Topic: Loans & interest deductions
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