A UGMA account is a way to hold money or investments in a child's name while an adult manages it until the child reaches adulthood

UGMA stands for Uniform Gifts to Minors Act. It is a legal structure that lets you put money, stocks, bonds, or mutual funds into an account registered to your child, with you or another adult acting as the custodian. You control the account and make all the decisions about how the money is invested until your child turns 18 or 21, depending on your state. At that age, the account transfers to your child's full control, whether or not they are ready.

The main reason people open UGMA accounts is to save for a child's future while getting a tax advantage. Money in the account belongs to the child legally, so it is taxed at the child's tax rate rather than yours — which is usually lower. You can also move money out of your own estate this way, which matters if you have significant assets.

UGMA accounts are simple to set up and require no court involvement. You open one at a bank, brokerage, or investment firm by providing the child's Social Security number and naming yourself as custodian. There are no annual fees or paperwork beyond what the financial institution requires.

Key Takeaways

  • A UGMA account holds money or investments in your child's name, with you managing it as custodian until they reach 18 or 21.
  • Money in the account is taxed at your child's rate, not yours, which usually means a lower tax bill on earnings.
  • You can contribute any amount, but gifts over a certain threshold (currently $18,000 per year per donor) may trigger gift tax reporting.
  • When your child reaches the age of majority in your state, the account becomes theirs to control completely — you cannot keep managing it or restrict how they spend it.
  • UGMA accounts are different from 529 college savings plans, which have stricter rules about what the money can be used for.

How money flows into and out of a UGMA account

You can put money into a UGMA account in several ways. The most common is a direct deposit or transfer from your bank account. You can also contribute stocks or mutual funds you already own, or have relatives and friends give money directly to the account as gifts. Some people fund UGMA accounts with money from life insurance payouts or inheritances meant for the child.

Once money is in the account, you decide how to invest it — or you can leave it in cash. You can buy stocks, bonds, mutual funds, or exchange-traded funds. You can also move money between investments as you see fit. The child does not have to know about these decisions while you are the custodian.

Taking money out is where UGMA accounts get strict. While you are the custodian, you can withdraw money only for the child's benefit — things like education, medical care, or living expenses. You cannot take the money for yourself or use it to pay for things you would normally pay for anyway (like groceries or rent). If you do, the IRS can treat it as a gift from you to yourself, which creates tax problems.

Once your child reaches 18 or 21, depending on your state, the account is theirs. They can withdraw all of it, invest it differently, or spend it however they want. You have no say and no legal right to stop them.

Tax treatment and the kiddie tax rule

The tax advantage of a UGMA account comes from the fact that investment earnings are taxed at your child's rate. For 2024, a child can earn up to $1,450 in investment income before owing any federal income tax (this amount changes yearly). Above that, earnings are taxed at the child's rate, which is usually 10% or 12% — much lower than an adult's rate.

However, there is a catch called the kiddie tax. If your child is under 18 (or under 24 if they are a full-time student with limited income), investment earnings above a certain threshold are taxed at your rate, not theirs. For 2024, that threshold is $1,450. So if your child's investments earn $2,000, the first $1,450 is taxed at their rate, and the remaining $550 is taxed at yours.

Contributions you make to the account are not taxed — only the earnings are. If you put $5,000 into the account and it grows to $6,000, only the $1,000 gain is subject to tax.

There is also a gift tax consideration. You can give up to $18,000 per year (in 2024) to a UGMA account without filing a gift tax return. If you give more than that in a single year, you must file Form 709 with the IRS, though you likely will not owe tax unless you have given away more than $13.61 million in your lifetime.

UGMA versus UTMA and 529 plans

You may hear about UTMA accounts, which stands for Uniform Transfers to Minors Act. UTMA is similar to UGMA but allows you to transfer a wider range of assets — including real estate, artwork, and business interests — not just money and securities. UTMA also lets you set the age at which the child takes control (you can delay it past 18 or 21 if your state allows). Otherwise, they work the same way.

A 529 college savings plan is different. Money in a 529 is meant for education expenses — tuition, room and board, books. If you withdraw it for anything else, you pay income tax on the earnings plus a 10% penalty. A UGMA account has no such restriction; you can use the money for any purpose that benefits the child. This makes UGMA more flexible, but 529 plans offer a bigger tax advantage if education is the goal.

Another difference: a 529 plan stays under your control even after your child turns 18. A UGMA account does not. Once your child reaches the age of majority, it is theirs to manage.

What happens when your child turns 18 or 21

The age at which your child takes control of a UGMA account depends on your state. In most states, it is 18. In a few states, including California, it is 21. Check your state's law or ask the financial institution where you opened the account.

When that birthday arrives, the account automatically transfers to your child. You are no longer the custodian. Your child can withdraw all the money, move it to a different investment, or leave it where it is. You cannot stop them, and you have no legal right to manage it anymore.

This is one of the biggest risks of a UGMA account. If your child is not financially mature at 18 or 21, they could spend the money quickly or make poor investment choices. Unlike a trust, which can have conditions and restrictions, a UGMA account gives your child complete control once they reach the age of majority.

When a UGMA account makes sense

A UGMA account works well if you want to save money for a child's future and do not need the money back for yourself. It is straightforward to set up and has lower fees than a trust. It is also a good choice if you want to move money out of your estate for tax reasons, or if you want to teach a child about investing and money management.

A UGMA account is less suitable if you want to control how the money is spent after your child turns 18, or if you think your child might not be ready to manage a large sum at that age. It is also not the best choice if the money is meant for education only — a 529 plan has better tax benefits for that purpose.

If you have concerns about your child's financial maturity or want more control over how the money is used, a trust might be a better option, though it is more expensive to set up and maintain.

Frequently Asked Questions

Can I change my mind and take the money back out of a UGMA account?

Once you put money into a UGMA account, it legally belongs to your child. You cannot take it back. You can only withdraw it for the child's benefit — education, medical care, living expenses. If you withdraw it for yourself, you are breaking the law and may face tax penalties.

What happens to a UGMA account if the custodian dies?

If you are the custodian and you die, the account does not go into probate. It passes to a successor custodian you named when you opened the account, or to whoever the financial institution appoints if you did not name one. The money stays in the account and continues to grow until your child reaches the age of majority.

Does a UGMA account affect financial aid for college?

Yes. Money in a UGMA account is counted as your child's asset when calculating financial aid. This can reduce the amount of aid they receive, because colleges expect students to contribute their own assets first. A 529 plan has a smaller impact on financial aid calculations.

Can I open a UGMA account for a grandchild or niece?

Yes. You do not have to be the parent. Any adult can open a UGMA account for any minor and act as custodian. The same rules apply — you manage it until they turn 18 or 21, then it becomes theirs.

What if my child is already 18 — can I still open a UGMA account?

No. UGMA accounts are only for minors. Once your child turns 18, they are an adult and can open their own investment accounts. You can still give them money as a gift, but it will not have the same tax advantages.