How UGMA Withdrawals Work: Can You Use UGMAs for Current Expenses?

A UGMA or UTMA account is a vehicle to save and invest money on your child’s behalf before they’re old enough to take control of their investments directly. Any contributions to the account become your child’s legal property.

Many parents choose to set up a UGMA account with the future in mind. You might expect your child to use UGMA (“Uniform Gifts to Minors Act”) money for college expenses, or wait even longer to use the funds for a down payment on a home or other adult milestones. 

But there may be some cases where it makes sense to use some UGMA funds for your child now. Here’s how, and why, to strike a balance between using UGMA money for current and future expenses.

Who Controls UGMA Accounts

UGMA accounts are a type of custodial account, meaning they belong to a minor but a custodian (e.g., the parent) manages the account on the child’s behalf. Children under age 18 can’t legally own stocks and other investments directly, so a custodial account is a way to get the advantage of investment growth before kids are old enough to control their own finances.

Your child still owns any funds in a UGMA account. The custodian has a fiduciary responsibility to manage funds in the best interest of the child. That means making prudent investments, and also that any withdrawal you make must be used for the direct benefit of the child.

When your child comes of age, they’ll take control of the account and access the funds directly. In the meantime, as your child grows, you may be able to use some funds toward certain expenses for their benefit.

How Withdrawals From a UGMA Account Work

A UGMA account is an irrevocable fund, meaning once you contribute to the account, you can’t withdraw the money for another purpose or redistribute funds to a different beneficiary, like another child or yourself. You can take money from a UGMA or UTMA account for certain expenses, though, as long as you are following several requirements. 

1. Expenses have to be directly for the child’s benefit. The Uniform Transfers to Minors Act states, “A custodian may deliver or pay to the minor or expend for the minor’s benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor.” 

2. These expenses have to fall outside of basic needs like food, essential clothing and shelter. The Act specifically mentions that any money from a custodial fund is in addition to, not a substitution for, supporting the child. 

3. Everything you withdraw has to go toward an eligible expense for the child. That is, you can’t have leftover funds that go to anything else. Every state sets up its own UTMA and UGMA rules, but you can generally expect to see language requiring detailed record-keeping. Plan to account for how you spent the money so you can explain it to your child or the IRS. As a result, be exact. You can check your state law or talk with a financial advisor to be sure, but generally you can use a UGMA withdrawal to pay an expense directly or reimburse yourself. 

How quickly do you have to reimburse yourself?

If you pay for child expenses directly and then plan to reimburse yourself from UGMA funds, state law may not specify how long you have to make that reimbursement; check with your specific UGMA or UTMA provider or a financial professional. Generally, sooner is better, especially since you need to keep detailed records for the IRS. Ultimately, your responsibility as a custodian is to manage the funds with the child’s best interest in mind. Reimbursing yourself for summer camp fees within a few months might be fine. Retroactively claiming multiple summers’ worth of camp expenses might shift the needle more toward acting in your own interest than the child’s.

What expenses likely count

UGMA funds can go toward various purchases and experiences your child might enjoy. Here are some examples that are likely to fit the bill:

• Summer camp

• Education expenses (e.g., private school tuition)

• Electronics (e.g., a laptop for the child’s personal use)

• Extracurricular activities

UGMA investments have some tax advantages compared to investing as an adult. If you opened a UGMA to save both for your baby’s long-term nest egg and private school fees in the shorter term (or a car for a sweet 16), your contributions might grow more than they would if you were paying your own tax rate on all the gains.

What expenses don’t count

As a custodian, you can take as much money as you think is reasonable for your child’s “use and benefit” from their UGMA. But just because your child gets some benefit from a purchase doesn’t make it a justifiable expense. Expenses that likely won’t fall under proper use of your child’s account include:

• Food

• Shelter

• Most clothing

• Medical and dental expenses

• Daycare or other regular childcare services

• Family vacations

• Any expenses that aren’t directly for the child

As a parent, you have a legal (and moral) responsibility to provide for your child’s needs. You can’t use your child’s protected money to pay for necessities you’d owe them anyway.

You also can’t use the money for an expense that isn’t for the child’s direct, specific benefit. You can’t justify using their UGMA toward the down payment for your family home—even if you promise them their own room. A Disney vacation may not be a necessity, but it’s going to look weird if you pay your child’s ticket out of the UGMA account, while using household savings for everyone else. 

How to Balance Present and Future UGMA Goals

Most parents set up a UGMA with the intention that their child will be the one to use it when they’re an adult. Money in a UGMA or UTMA legally belongs to the child, so it gets more complicated if you plan to withdraw and spend funds. On the other hand, UGMA accounts have tax advantages on some gains and can be an out-of-sight, out-of-mind way to save in advance for plans like private school tuition. You need to balance the advantages against the inconvenience of record-keeping.

One good approach might be to write out the different goals you have for the account. You might set a target number for how much you want to have in the account by the time your child turns 18, and list childhood experiences you’d like to offer if you can. If your contributions put you ahead of schedule to reach that number, it might make sense to consider using a portion of them if a special opportunity for your child comes up. 

You can contribute to a UGMA with the intention of using some funds for a particular purpose while your child is young (e.g., Waldorf preschool), or use UGMA money only for unexpected opportunities that weren’t in your usual budget and routine (e.g., an invitation to a gifted and talented program trip). In these cases, you might decide on a certain dollar amount or percentage that you feel is reasonable to spend now, and commit to reserving the rest for your child’s future.

Sometimes, grandparents or other loved ones want to contribute to a UGMA. You can discuss their wishes — are they hoping the gift will go toward college funds, or are they happy seeing the money go toward other enriching experiences?

You should talk to a financial advisor with experience in UGMA accounts to learn how to make withdrawals and keep appropriate records. State laws or particular UGMA providers may set different rules for which expenses are allowed, so look closely at your UGMA documents before taking action.

A UGMA or UTMA account is a resource for your child. While you may plan for them to use the money in adulthood, there can be reasons to enjoy some of the benefit earlier. Take the time to understand how to use money properly and keep clear records to show you’re reflecting your child’s best interests, both now and in the future.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards. This article has been reviewed and approved by a compliance professional who is a licensed life insurance agent.

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