When it comes to helping kids learn about finances and long term savings, there are so many different ways it can be approached. But, one of the best ways I have found to help my kids out in the future is with different savings vehicles. This is especially true of UGMA & UTMA accounts.
What are UGMA & UTMA accounts?
Both UGMA’s (Uniform Gifts to Minors Act) and UTMA’s (Uniform Transfers to Minors Act) are custodial accounts. These accounts will be managed by whoever set them up for the minor child until they reach the age of 18 (or sometimes until the age of 25, depending upon the specific rules of the account you choose).
These accounts can be made up of:
- Mutual funds.
- Insurance policies.
Once the money is deposited into these accounts it cannot be withdrawn until the child is of age and chooses to withdraw it. However, a big perk is that it can be withdrawn for anything without any penalties. This is different from a lot of other types of custodial accounts.
Both accounts essentially perform the same function but have a very slight difference between them. While a UGMA account can be made up of all of the previously mentioned types of investments, UTMA accounts can have a bit more included.
UTMA accounts can also house any form of property. Therefore, if you, as the asset manager, want to put your car or house in there for your child, you can. But not all states recognize UTMA accounts, so check with your state first to make sure the option is valid there.
Why are UGMA & UTMA accounts a good savings vehicle for your kids?
Both of these accounts can grow exponentially over time, which makes them great savings vehicles for your kids, especially since the interest they earn will be based on the average market return for the stock market, as opposed to much lower basic savings account rates. And these rates usually average between 6% – 7%, which is a lot higher than even high-yield savings accounts.
Ultimately, these accounts can help your kids learn a valuable lesson about how much more their money is worth in the future than it is today. Saving can be difficult for kids, so these accounts can help with that since they won’t be able to withdraw anything until they are at least 18.
This way, they can continue to watch the account grow without potentially diminishing how much they are saving. Plus, it gives friends and family members another way to give your kids gifts as opposed to just buying more stuff they don’t need.
The hope is that by the time they are adults, they will have spent enough time watching the account grow that they will realize how long it took to get there and not touch it. At least, that is what I’m hoping for my kids, especially my natural spenders!
What should you know before opening a UGMA or UTMA account?
If you are thinking about opening one of these accounts for your child, it’s important to remember that you will be the custodian of the account until they turn 18 and can manage it themselves. So, this will require a little bit of time and work on your end, depending on how much money they end up putting into the account regularly.
Since these types of accounts are set up as trust accounts for your kids, it makes them safe in times of crisis. Meaning that you, as the parents, nor other family members can touch these accounts. Only the children once they turn 18 can withdraw money from the accounts, which makes them one of the safest savings vehicle options for kids.
This also means that it helps your kids get through the financially tumultuous teenage years intact since they can’t touch this money either.
However, these accounts will be taxed with standard capital gains taxes for any annual unearned income over $2,200. This is definitely something to keep in mind. Usually, the recipient (the child) is the one taxed though. So, they will be taxed based on their tax threshold, which is usually much lower than any adult would be taxed.
Where can you open UGMA & UTMA accounts?
Luckily, there are quite a few good options for opening UGMA & UTMA accounts. If you already have investment accounts somewhere, I would suggest starting with these first. Having all of the investment accounts in one area just reduces your overall headache when it comes to managing them. And as someone who has five kids, each with their own accounts on top of our accounts, I simply need one platform to help minimize my time spent on this.
However, if you don’t have investment accounts yet, or if the company you are working with doesn’t offer UGMA or UTMA accounts, then here are a couple of great choices to take a look at.
TD Ameritrade UGMA and UTMA accounts have a few more investing options than other options. They have a much wider range of investments to invest in, but the fee is usually $6.95 per trade.
However, their investment platform is one of the most robust on the market, with educational tools the can help beginners learn the basics of investing. So, if you prefer things that are a little more technologically advanced and want to trade like a Wall Street trader, then this might be the best platform for you.
E*TRADE offers custodial UGMA and UTMA accounts on their fully online platform. As the oldest online brokerage, they have been around long enough to work out a lot of the bugs with digital trading.
Their higher trade fee of $6.95 ranks right up there with TD Ameritrade though, so it’s not the lowest feed custodial account on the market. But, they do give you over 4400 no-transaction-fee mutual funds to choose from, which helps offset the cost. They also have a lot of useful tools and research at your fingertips to help you and your child make informed choices.
Who should open these types of accounts?
If your child is okay with putting the money they get as gifts, chore money, money from selling their toys, etc. into this account, then this might be a great fit. If so, you then have the opportunity to explain how compounding works to get them excited about the future prospects of growth.
If you want to help your child learn about investing and save for their future at the same time, then these accounts are right up your alley.
UGMA and UTMA accounts are also great for anyone who is okay with managing investment accounts themselves, or are at least willing to learn. Ultimately, this can be a great family financial bonding experience.
What other types of accounts can you open for your kids?
There are a ton of different types of accounts you can open for your kids while they are still minors. The biggest question is which one(s) will serve them the best? Followed by which one(s) will be the easiest to open? Because, ultimately, that is a big determining factor with opening accounts for kids.
Savings accounts are the easiest type of account to open for a minor. As a kid, this was the only account my brothers and I had as a savings vehicle. This was sad because the savings rates on these are less than minimal. However, if you open a high-yield savings account for them, their return will be a bit higher, depending on the market.
Luckily, opening a savings account for your kids is fairly easy and straightforward. Usually, they will just require you to fill out a simple form with both your personal information and that of your child’s. Then you will need to make a small deposit to activate the account and you’re all set to go. This is a great first account to begin getting your kids excited about finances.
Getting a checking account set up for your minor child is a bit more difficult of a process. This is due to the fact that a lot of banks don’t have a tolerance for setting up minor accounts for children under the age of 13.
Therefore, if you have a child under the age of 13, I’ve found the smaller local banks to be more amenable here. I actually had to go to my local business bank to get my children’s checking accounts set up for all of our kids under 13, since my other bank wouldn’t do it. Luckily, it was a really easy process to complete since I already had accounts with them. I just had to sign a couple of forms stating that it was a joint account and I could be responsible if they overdrew the account.
But, if you have a teen, then your chances of opening a checking account for them exponentially increase. In fact, there are some great companies, such as Current, that are focusing specifically on teen checking accounts. And with companies like Current, you get to manage your teen’s account and help them learn the ins and outs of fiscal responsibility.
For most kids, it will be a bit more difficult to open a retirement account for them since they probably aren’t working. However, if they are working at all, even if it’s just for your business, then opening a custodial Roth IRA is a great retirement account to consider.
This is actually how my kids got started with investing. Since all five of my kids work for me with one of my businesses, and I pay them for their work through the business, they have earned income. Which is the requirement for a child to have a custodial Roth IRA account.
These accounts are awesome because they won’t have to pay taxes on anything they contribute when they go to withdraw it, only what they have earned on their contributions. And it teaches them how to invest in the stock market, as well as how volatile it can be.
If you want to reap the rewards of helping your kids save for college and watch the money grow tax-free, then a 529 account is what you probably want. These accounts are offered in every state and you can purchase one that isn’t in your state if you like the way it is structured better. There are also no limits as to how much you can contribute, so the money could potentially grow much faster in these types of accounts. The caveat to 529 accounts is that the money must be used for educational purposes.
Helping your kids get a great financial head start in their adult life is much easier with UGMA and UTMA accounts. Since they aren’t discussed as frequently as some of the other more widely known savings vehicles though, they often get overlooked. There is no time like the present to take a look into these awesome accounts for your kids’ future. And maybe teach them a little something about investing along the way!