What Are the Account Maximums and Limitations When Investing for Kids?

Taking small actions now to invest for your kids can help build a strong financial foundation in years to come. The question is what plan can help your contributions have the biggest impact.

For the purposes of this article, when we’re talking about investing for kids, we’re referring to a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. These are custodial accounts available in every state that can make it simple to set up an investment account while your child is still a minor. UGMA accounts may have fewer restrictions than certain other options to invest for kids.

Financial Limits for Kids’ Investing Accounts

UGMA and UTMA accounts tend to offer a lot of flexibility in how you contribute and how your child will be able to use the funds. Here’s what you should know.

Tax exemptions

UGMA accounts have some tax advantages that may help your child’s money grow. The first $1,300 of earnings is exempt from federal income tax for minors with no earned income. Up to $1,300 over that amount is taxed at the child’s rate rather than the custodian’s. Most adults are in a higher tax bracket than their children, so chances are that you’ll see lower taxes due to this rule. Any earnings over that $2,600 mark are taxed at the parent’s rate.

Maximum contribution

There’s no official maximum on how much you can contribute to your child’s UGMA investing account. The annual exclusion from gift taxes updates every year. In 2024, you can give up to $18,000 as an individual without gift tax kicking in ($36,000 for married couples filing jointly). This might be an advantage over setting up a Roth IRA for your child, because in that case you’d be limited to the lesser amount of $7,000 or 100% of your child’s earned income.

Withdrawals

Once a minor reaches the age to take control of the account (age varies by state, but typically 18 or 21), they can use the money for anything they choose, without restriction. Education, travel, bills—anything is fair game. This can be an advantage if you’d rather avoid the restrictions that come with a 529 plan or Roth IRA (the former needs to be used for qualified education expenses, and the latter can go only for certain expenses like education or retirement).

For the adult managing the account, though, your withdrawals are highly restricted. You have a fiduciary duty to manage the account in the child’s best interest, not your own, because the money in the UGMA or UTMA belongs to the child, not to you. You may have some leeway to use funds in a UGMA account for certain expenses for the child (e.g., summer camp), but you’ll need to document any withdrawals down to the penny.

There may also be rules about what expenses qualify as appropriate use of a UGMA withdrawal even if it’s for the child. For example, it likely wouldn’t be acceptable for you to use UGMA funds to cover regular expenses like groceries or basic school supplies. Consider working with a financial professional if you’re planning on taking anything out of the account before your child reaches adulthood.

UGMA Limits on Asset Type

UGMA and UTMA accounts are similar, but not identical. They both offer a simple, convenient way to invest for your kids. You can contribute as much as you like (keeping in mind that gift tax will apply once you go over the gift tax exclusion limit), and your child can use the money freely to pursue their goals when they come of age.

The main distinction between UGMA and UTMA accounts is what type of assets you can put into each.

With a UGMA account, you can contribute a variety of financial assets, including:

• Cash

• Stocks

• Bonds

• Mutual funds

• Exchange-traded funds (ETFs)

• Life insurance policies (if your state and UGMA plan allow)

• Annuities

• Other applicable financial securities

Unlike a UTMA account, a UGMA can’t hold tangible property. You cannot use a UGMA as a vehicle for physical gifts like:

• Real estate

• Car or other vehicle

• Precious stones

• Fine art

• Musical instruments

• Collectible items (e.g., rare coins)

Is a UGMA Account Right for Your Child?

Before opening a UGMA or UTMA account, consider these questions to make sure this feels like a good fit for your financial plans:

• Are you comfortable with irrevocable contributions? UGMA contributions are irrevocable and belong to the child. Roth IRA contributions may also be irrevocable. If you want the ability to take back money later or change the beneficiary (for example, reassigning the funds to this child’s sibling), you might want to consider a revocable trust or a 529 plan instead.

• Do you want your child to be able to use money for any purpose? A UGMA account won’t penalize your child for using funds for “non-qualified education expenses” the way a 529 plan would. Your child could use the money to start a business, pay for a house— or splurge on more frivolous purchases. Decide if you’re comfortable with a young adult having full control over the money.

• How does investing for kids fit into your college savings planning? While a UGMA or UTMA account offers more freedom, a 529 plan has greater tax advantages for college savings contributions and less impact dollar for dollar on financial aid. Many parents use multiple types of accounts to put money toward their children’s future, so you might want to talk with a financial professional or set your own targets for how to allocate your contributions.

Contributing to a UGMA can be a powerful move for your child’s future financial stability because there are few restrictions on how much you can add or how your child can use the money. If loved ones want to give financial gifts, you can invite them to join in on building a resource for your child to put toward any plan that’s right for them.

Fabric by Gerber Life and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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