A UGMA (Uniform Gifts to Minors Act) investment account is a financial tool that allows a custodian (i.e.: parent, guardian, etc.) to invest on behalf of a minor child (“minor” or “child”). It provides a way to hold and manage assets until the child reaches adulthood. The account is held in the child's name, but the custodians have control over the investments until the child reaches the age of majority, age 18-21, depending on your state. It might offer a tax advantage by allowing the child to potentially pay lower taxes on investment gains or losses. For more information, see our blog post, “UGMA 101: A Parent's Guide to Custodial Accounts.”

The account will legally transfer to your child when they reach the “age of majority.” The specific age of transfer is determined by each state, and may be anywhere from 18 to 21.

UGMA accounts are taxable accounts, but they are typically taxed at the minor’s tax rate, which is generally lower than the parent’s tax rate. Typically, the first $1,350 of unearned income each year in the account is treated as tax-free. The next $1,350 in unearned income is taxed at the child’s rate. Anything above $2,700 in annual earnings from the account would be taxed at the parent’s tax rate. So in most cases, there are no taxes paid each year, or taxes will be much less than in a standard investment account. Here is an example:

Little Johnny receives $1,500 in dividends and capital gains from investments in his UGMA account. The first $1,350 is tax-free. The remaining $150 would be subject to tax at Johnny’s tax rate. Since Johnny is in the lowest tax bracket (10%), he would only owe $15 in taxes on the $150 of income.

Now, let's consider the same $1,500 of investment income held in a regular taxable account without the benefit of the child's lower tax rate. If Johnny’s parents are in a 30% tax bracket, they would owe $450 in taxes on the entire $1,500 of income at their higher tax rate.

In this example, the UGMA account allows for potential tax savings compared to a regular taxable account, as the child's lower tax rate results in a lower tax liability on the investment income.

Prior to the age of majority, the money is available for anything that directly benefits the minor. Whether you want to invest now for future education costs, astronaut camp, or band equipment, for example, the money in this account will be available when you need it. Once the minor reaches the age of majority, there are no restrictions on how the money can be used. It could be used for college expenses, a down payment on a house, or an emergency fund, for example “How UGMA Withdrawals Work: Can You Use UGMAs for Current Expenses?”

A UGMA account and a 529 account are both popular options for saving and investing for a child's future. However, a UGMA account offers greater flexibility and control over the funds. A 529 account is generally designed for educational expenses and, in certain circumstances, can be used to jumpstart retirement saving. In contrast, a UGMA account allows funds to be used for anything that directly benefits the minor. When they reach the “age of majority” (18-21, depending on your state), UGMA funds can be used for a wider range of purposes, such as buying a car or starting a business, for example. Additionally, UGMA accounts have no contribution limits, providing the opportunity to save larger amounts (be sure to check Federal and State gifting limits before contributing). While both accounts have their advantages, a UGMA account can be a versatile tool for parents seeking financial flexibility for their child's future.

Note that a UGMA account could potentially impact a student’s eligibility for financial aid, including federal aid through FAFSA, as the UGMA is considered the child’s asset. Additionally, 529 accounts may come with certain tax deductions or tax credits that vary by state. For more information, see our blog post, “UGMA vs. 529: What's the Difference, and Which Should I Use?"

W&S Advisory Services, LLC (“W&S Advisory Services” or the "firm”) is an SEC-registered investment adviser* under the Investment Advisers Act of 1940 (as amended). W&S Advisory Services develops and manages the model portfolios from which customers can select based on their investment profile. For more information on W&S Advisory Services, visit https://meetfabric.com/legal/terms-of-use to obtain copies of the firm’s Form ADV Part 2A and Appendix 1 brochures.

With our 30-day free trial, you'll enjoy full access to your kid's investment account for the first 30 days, without paying Fabric’s UGMA admin fees.

After the trial, you'll be charged a monthly fee of $3.00 for one account or $5.00 for more than one account.

All custodial fees, brokerage commissions, stock transfer fees, and other similar charges incurred in connection with transactions for the account will be paid out of the monthly fee and not the account's assets. The monthly fee will be billed directly to your linked payment method, ensuring that deposits and contributions to your child’s account remain unaffected.

Visit meetfabric.com/legal for additional info.

Opening an account only take a few minutes, but it can be even quicker if you already have the following information:

• Child’s name, address, and SSN (unfortunately, an account cannot be created for an unborn child who does not yet have a SSN)

• Custodian’s name, address, and SSN

A custodian (i.e., parent, guardian, etc.) can contribute through monthly deposits into an active kid’s investment account.

A minimum contribution of $20 per child is required within the first 6 months to keep the account open.

You can contribute in three ways:

1. One-time contributions: Make a single payment whenever you choose

2. Recurring contributions: Set up automatic payments on a schedule that works for you

3. Gifts from family and friends: Send your child’s unique gifting link to loved ones—their gift counts towards your account minimum.

The minimum contribution for either method is $20.00.

No—while an investment account can certainly earn money (called “returns”), it doesn’t “earn interest” like a savings account.

A savings account has a fixed interest rate, which means that the money in your account earns a fixed amount based on your account balance. Savings accounts are generally “low risk, low reward,” because while you won’t lose money, but the interest rate on your account is capped by the FDIC.

An investment account has a variable return rate that is not fixed or capped, and fluctuates with the stock market, which means more risk but also potential for higher returns than a savings account.

It’s common to see people with both a savings account for immediate needs, and an investment account for longer term growth potential. A 401k, for example, is a common type of long term investment account for retirement.

When creating an account for your child’s future use, an investment account can be quite powerful, because it gives the money you put in time to grow at a rate that could be higher than a savings account.