Using an UGMA or an UTMA for College Savings

Should You Use a Custodial Account for Your Kid’s College Fund?


The Balance / Julie Bang

If you want more flexibility in terms of where your child's education fund goes, you may have considered a custodial account. That way, the money won't necessarily have to be used for education, but you'll still get certain tax benefits.

Some states offer Uniform Gift to Minors Act (UGMA) accounts and other states offer Uniform Transfer to Minors Act accounts (UTMA). Although these accounts are very similar, the type of assets you can contribute to the account and the age at which the beneficiary can access the account may differ.

Key Takeaways

  • Depending on the state and account specifications, the beneficiary of an UGMA or an UTMA could receive the money in the account between age 18 to age 25.
  • UTMAs allow virtually any asset to be transferred, while UGMAs only allow securities, insurance policies, and cash.
  • The tax benefits of UGMAs and UTMAs are identical, and the first $2,300 is subject to low or no taxes.

How UGMA and UTMA Accounts Work

Tax Benefits  The first $1,150 is tax free. The second $1,150 is taxed at the child's tax rate. The first $1,150 is tax free. The second $1,150 is taxed at the child's tax rate.
Assets You Can Contribute Cash, securities, and insurance policies. Any kind of asset.
Eligible Expenses Any expense that benefits the child. Not limited to education. Any expense that benefits the child. Not limited to education.
Financial Aid Impact Counted as child's income when applying for financial aid.  Counted as child's income when applying for financial aid.  
Contribution Limits None. None.

Tax Benefits

Every child younger than 18 (or up to 24 for full-time students) who files federal income tax as dependents of their parents or guardians is allowed a certain amount of unearned income at a reduced tax rate.

In 2022, the first $1,150 in a UGMA or UTMA was considered tax-free, and the next $1,150 was taxed at the child's income tax rate. Anything above $2,300 is taxed at the parents’ rate, which may be as high as 37%. This exemption is per child, not per account.

Assets You Can Contribute

UTMA accounts will allow you to contribute more types of assets. You can contribute almost any type of asset, including real estate, to an UTMA account.

You can only contribute cash, insurance policies, and securities, including stocks, bonds, and mutual funds to an UGMA account.

Eligible Expenses

A custodian can initiate a withdrawal for the benefit of the child, as long as the expenses are for legitimate needs. Any expense that is for the benefit of the child, such as pre-college educational expenses, may be paid from the custodial account at the custodian’s discretion.

Unlike other college savings accounts, however, these expenses are not limited to education and can be used for anything related to the child. Upon becoming a legal adult, the beneficiary can use the money without limitations.

Impact on Federal Financial Aid Eligibility

If your child has a custodial account, it will be considered an asset and will need to be added to the FAFSA. Students will be expected to contribute at least 20% of their assets towards their educational expenses.


While parents might want the funds or assets from an UTMA or UGMA account to be used for college, the beneficiary can use the money for something else as soon as they reach the age of majority.

Contribution Limits

There are no contribution limits for UGMAs or UTMAs. However, there are some tax consequences that you should keep in mind.

Every year, each parent can give each of their children $16,000 per year, or $32,000 from two parents, without having to use the lifetime gift tax exemption. Grandparents can also give the same annual amount to each of their children and grandchildren without having to use any lifetime gift tax exemption.

If you're planning on putting more money than that in, you might want to consider setting up a trust or putting some of the money into a 529 account.

If you're planning on getting close to needing to use the lifetime gift tax exemption, you may want to consult a financial advisor.

When Can Beneficiaries Access UGMA and UTMA Accounts?

UGMA and UTMA are custodial accounts, which are used to hold and protect assets for minors until they reach the age of majority in their state. Depending on the state, the age of majority might be age 18, 21, or as old as 25.

After the beneficiary reaches the age of majority, the account becomes theirs. They have complete control over the account, and can spend the money as they wish.

Potential Drawbacks of UGMAs and UTMAs

Although the first $2,300 in income is sheltered from higher taxes, the rest of the money added is taxed at the parents’ marginal tax bracket.This wouldn't be an issue with college funds held in a Section 529 plan or a Coverdell ESA.

The account format also requires a custodian to hand over control of the assets to the child anywhere from age 18 to 25, depending on the state and account.

Not all people in their late teens and early 20s are responsible. Although many children will use the funds for college or other productive endeavors, there's always a risk that the beneficiary will act irresponsibly without parental oversight.

Frequently Asked Questions

Which is better, an UGMA/UTMA, or a 529 plan?

The college savings plan that works best for you depends on your family's situation. A 529 plan will generally offer better tax benefits, but the money must be used for education. Although UGMA and UTMA plans have fewer tax benefits, they don't necessarily have to be used for educational expenses. If you are certain that the money will be used for education, a 529 plan is probably a better fit for your family. If you think the money could be used for education or something else, an UGMA or an UTMA plan may be a better fit for your family.

When should you start saving for college?

It's always best to start saving for your child's college education as soon as possible. That way, you'll give your money more time to work for you, through the power of compound interest. However, retirement should always be your first priority. There are financial aid options for college, as well as lower-cost schools.

How much money should I save for my kid's college education?

Your savings goal for college should be based on what you can afford and what you expect college when your kids turn 18. If you can, you may want to discuss these questions as a family or with a financial advisor so you can determine an attainable savings target and turn that into a monthly savings plan.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)."

  2. Charles Schwab. "Understanding the Kiddie Tax."

  3. FINRA. "Saving for College: UGMA and UTMA Custodial Accounts."

  4. Uniform Law Commission. "Uniform Transfers to Minors Act," Page 25-26.

  5. Federal Student Aid. "The EFC Formula, 2022-2023," Page 10.

  6. Merrill. "UTMA/UGMA vs. 529 Plans: What Are the Key Differences?"

  7. J.P. Morgan. "Custodial Accounts."

  8. Internal Revenue Service (IRS). "Topic No. 313 Qualified Tuition Programs (QTPs)."

  9. Internal Revenue Service (IRS). "Topic No. 310 Coverdell Education Savings Accounts."

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