How Money Flows Through a UGMA Account

Parents know there’s a fine line between “Finally, a peaceful moment,” and, “The kids are being too quiet—I’d better go check.”

When it comes to money, you might feel the same way. It can be a relief to take an “out of sight, out of mind” approach to investing for your kids, or you may have lingering questions about what’s going on with the account. First, it may be helpful to make sure you understand what it really means to invest on behalf of your kids. Then, take it a step further with our step-by-step guide to help illustrate how money moves through a Uniform Gifts to Minors Act (UGMA) account and how you can manage investments for your child.

Step 1: Contribute Money

When you contribute money to a UGMA account, it’s an irrevocable gift. The account belongs to the minor, but you’ll manage it until they reach the age of maturity (18 or 21 in most states). You may be able to set up automated monthly contributions to make it more convenient to put money toward your child’s investments.

Different UGMA accounts may set different minimums for how much you need to contribute to open an account. In some cases, a UGMA account may require a minimum monthly contribution. When you’re comparing UGMA options, consider account minimums and fees to find an account that fits comfortably with your plans.

Others can also contribute. Grandparents, relatives, or family friends, can give to the account via check, electronic transfer, or third-party apps like Venmo.

Step 2: Allocate UGMA Funds

UGMA accounts are available in all 50 states, but they aren’t identical. You can open a UGMA account through many banks or brokerages, and they may have some differences in how you choose and manage investments.

Some UGMA accounts offer self-directed options, where you choose each investment. Other UGMA accounts offer pre-set portfolio options, so you might choose between a more aggressive or conservative investment profile, but not hand-pick each investment. When you’re comparing UGMA options, think about whether you prefer the extra control of choosing each investment, or if you’d rather have the convenience of a pre-set portfolio.

Typically, a UGMA can have some form of holding account to keep cash if you aren’t automatically having contributions go into an investment portfolio. The cash account may offer interest, but interest rates may be low.

Step 3: Monitor Investment Performance and Pay Taxes

Once you’ve set up a schedule for contributions (automated if you can) and figured out where you want to invest money, you may be able to sit back and wait for market returns. Every year, you’ll also be responsible for taking care of taxes on your child’s behalf.

Investing is often a long-term process. You may not need to take major action in response to short-term market changes, rather sticking to an investment strategy you feel comfortable with and giving your money time to grow.

Step 4: Adjust Investments According to Your Plans

While investing can often be a relatively hands-off process, there are times when you may want to step in and take a more active role in managing money for your child.

For a self-directed account, you’d need to track investments yourself and make choices you think are in your child’s best interest. It may be worthwhile to discuss your goals for the account with a financial professional who can advise you on investing strategies.

With a pre-set portfolio, you might want to check in periodically to review the account. Talk with your child’s other parent or a financial professional about your plans, including how you plan to reallocate investments over time. For example, if you are hoping your child will use their UGMA funds toward education, you might want to consider adjusting from a more aggressive investing strategy to a more conservative one as your child nears college age, to lower their risk levels.

Adjusting, course-correcting and exploring new opportunities over the years may help you grow money for your child and respond to dips in the market. This can also be a great opportunity to open conversations about investing with your child and teach them about how you manage the account, to help them prepare to take over in the future.

Step 5: Withdraw Money Carefully

A UGMA is primarily designed to help you manage investments on your child’s behalf. As soon as any contributions go into the account, that money becomes your child’s property, and you have a responsibility to manage the funds in your child’s best interest. You may still be able to withdraw money from the account, but you will need to keep detailed records to prove that any money goes toward expenses for the child and not anything else. It may be wise to work with a financial advisor to make sure you’re following rules and maintaining clear records if you plan to withdraw money from a UGMA.

It may be possible to withdraw or transfer UGMA funds to put into a 529 plan for your child, but this may come with some conditions. Because any UGMA contributions are irrevocable gifts to your child, you might not be able to change the beneficiary of the 529 plan anymore once you transfer funds. Or, some 529 plans may require you to make your child the account owner. Look into rules carefully before transferring money out of a UGMA.

Step 6: Hand the Reins to Your Child

When your child reaches adulthood, they take full control of the UGMA account. Generally, your child can take over at age 18 or 21, depending on the state. This shift doesn’t change the money in the UGMA account—cash and investments stay where they are—but it is a significant change in who directs how the money moves from now on.

Your child may need to submit a form to access and start using their account. The account may end your access as a custodian when your child reaches the age to take over.

Learning good financial habits happens through years of practice. Hopefully, taking over the account is both the beginning of a new chapter of financial freedom for your child, and the culminating step of many lessons they’ve learned with you over the years. As your child nears the age to take over their own UGMA account, you may want to have them practice building a budget, learning investing basics or deciding on goals for what they plan to do with the money.

When you open a UGMA account, you’re on step one of a journey toward a more prepared, confident start to your child’s early adulthood. By taking small, consistent actions, you may be able to help establish investments for your child and teach financial lessons that will benefit your child when they make their way into the world.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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