UGMAs, 529s and More: The Best Ways to Give Money to Minors

It can be tough to keep up with great birthday or holiday gift ideas as kids get older (are unicorns still cool?). Offering a gift toward a child’s future is always a good option, but even then, it can be confusing to sort through different account choices. 

A Uniform Gifts for Minors Act (UGMA) account is an easy way to help jumpstart your child’s investment journey. There are alternate ways to give as well, so consider the pros and cons of different accounts to help you narrow in on a choice you feel good about.

How to Plan Gifts to Minors

The first step is to be clear about why you want to make a gift in the first place. Because you care about them and want them to have a bright future, sure—but more specific wishes can help determine what form of giving will work best.

Start by asking yourself these questions:

• What do you want to give for? Do you have a specific goal in mind, like college, or are you interested in a more open-ended gift?

• Is it more important for you to have flexibility and control over managing the account, or do you prioritize flexibility for the child?

• What stage of life do you want the child to be in when they use your gift?

Financial Options for Gifting to Minors

With your priorities and preferences in mind, you’re in a good place to review the advantages and disadvantages of different account types to find the best match.

529 plan

These state-sponsored plans are practically synonymous with college savings, although they’re not the only way to save money for your child’s education. A 529 account is convenient and typically comes with low or no minimum to open or contribute to the plan. These accounts also stay in the account owner’s control, so it’s easy to change the beneficiary.

One of the biggest draws of a 529 plan is the tax advantage. Contributions grow tax deferred, and withdrawals are tax free if the money goes toward qualifying expenses.

The biggest disadvantage is that a 529 plan sets tight limits on what you can use the money for. Various educational expenses qualify, from college tuition to books to vocational school or even private K-12 education, but if the minor wants to spend on something not education-related, they’re out of luck. Even some expenses like airfare for a study abroad semester may not count as a qualified education expense. If you take money from a 529 for a non-qualified expense, you’ll have to pay taxes and a 10 percent penalty on the withdrawal.

One other potential disadvantage to keep in mind is that unlike with a UGMA or trust account, a 529 plan owner may not have any fiduciary responsibility to the beneficiary. The owner can change beneficiaries, name themselves as the beneficiary or withdraw the money from the account.

Custodial Roth IRA

You may have a Roth IRA as part of your own retirement planning, but you may not realize you can open one for a child, even a baby. If you want to play the long game with your gift-giving strategy, preparing for a child’s long-term future can be an appealing path.

A custodial Roth IRA uses after-tax dollars. The money grows tax free and withdrawals are tax free after the minor reaches age 59 ½. You can withdraw contributions tax- and penalty-free at any time (but not gains). And, unlike most other options on this list, a custodial Roth IRA won’t affect financial aid for college.

One major advantage of this type of gift is that you take the idea of “good things come to those who wait” to a new extreme. Your contributions have great growth potential since they may have 50 years or more to build. There’s also some flexibility for children who need the money sooner—early withdrawal penalty exceptions include higher education expenses, a first home purchase or money following a birth or adoption.

One major drawback is a custodial Roth IRA is only an option if the child is earning income. A teenager’s after-school job or a baby’s modeling gig for pureed peas would work, but allowance won’t cut it. The amount you can contribute is also limited. In 2023, the limit is $6,500 or the child’s total income, whichever is less.

Some gift-givers may also feel wary about the 10 percent penalty and taxes that apply to withdrawals of gains before age 59 ½. It’s important to note that the early withdrawal exceptions come with some limitations. You can only take up to $10,000 for a first-time home purchase and up to $5,000 following qualified birth or adoption, so the child won’t be able to use their Roth IRA as a penalty-free source of a full down payment.

Trust fund

Opening a trust fund for a child offers several advantages. It may be a way for a gift giver to lower their taxable estate as part of their broader estate planning strategy. It also sets up funds for the child in a vehicle where the trustee, or the person who manages the trust, has a fiduciary duty to manage the account responsibly on the child’s behalf.

There are many kinds of trust, which can be an advantage in some cases. Some givers may have reasons to value additional control. Givers may want to set what age the child can start receiving distributions, such as at 25 or 30 years old. You may be able to build rewards or restrictions into a trust fund, like making distributions contingent on graduating college or being in recovery from a substance use issue. 

It can also be helpful to work with a financial or legal professional specializing in trusts to set up a trust fund for a child with disabilities or special needs. An experienced professional can go over structures and options to provide a gift without making the child ineligible for important health or financial benefits.

Creating a trust can be helpful for families with complex situations to consider. The complexity can also become a drawback for givers seeking a more straightforward option. Dealing with paperwork, working with professionals and setting up a trust can be complicated and costly. Some estimates suggest a typical trust costs around $1,500-2,500 to put in place.

UGMA or UTMA account

UGMA or UTMA accounts both operate as irrevocable custodial accounts. In other words, they’re set up on behalf of a child, and any contributions become the child’s property, no take-backs. All states have UGMA accounts available, and South Carolina is the only state that does not also offer UTMA accounts. The main difference between UGMA and UTMA accounts is that an UTMA can hold tangible property (e.g., jewelry, a car) in addition to financial assets.

UGMA accounts offer similar convenience to a 529 plan in that they are available through each state, typically free to open, and have no minimum or maximum contribution limits (although amounts over $17,000 or $34,000 for a married couple filing jointly may be subject to gift tax rules). Unlike a custodial Roth IRA, the child doesn’t need to earn income and there aren’t penalties for withdrawals. A UGMA or UTMA is simpler than most trust accounts, may have fewer fees and offers a high degree of flexibility. Once the child is old enough to take control of the account, they can use the money for whatever they wish.

A downside is that UGMA or UTMA accounts don’t offer the same tax advantages a 529 or Roth IRA can. The gains are taxable, although Kiddie Tax rules can lower what you’d pay on the first $2,500. But for some families, it’s worth it for the added freedom over how to spend the money and when the child can fully access the gift.

Depending on your plans, different account types could be good ways to set money aside for your children, grandchildren or other kids you love. Choose an account with specific features and benefits you want. UGMA accounts combine several commonly desired perks like convenience, low cost and high flexibility to use money however it’s most needed. If you decide that a UGMA is right for you, you can open one through Fabric by Gerber Life. A financial professional can also discuss your wishes and help you choose the best match for your plans.

Investments in securities products within any of these accounts are subject to market volatility. It is possible to lose some or all of the principal amount invested.

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

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