What is a UGMA Account? – Defined & Explained

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I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

Are you considering opening a Uniform Gifts to Minors Act (UGMA) account? If you wish to invest in your child’s future or start a college savings plan, a UGMA account may be your best choice.

However, understanding how they work can be challenging. In this blog post, we’ll break down the basics of UGMA accounts.

Key Takeaways
  • Opening a UGMA account is a straightforward process.
  • UGMA accounts are savings accounts for educational and other expenses for minors who cannot legally own investments.
  • A UGMA account may impede your chances to get federal financial aid for a college education.
  • UGMA accounts have advantages that a trust fund does not have, such as tax benefits and flexible pricing.

Uniform Gifts to Minors Act Definition

A Uniform Gifts to Minors Act (UGMA) account is a type of custodial account that allows parents or guardians to transfer financial assets into the name of a minor.

Minors can use the funds for various expenses, such as educational and medical costs.

How a UGMA Account Works

A UGMA account is a simple way to diversify your minor’s portfolio. These accounts give minors’ access to various investments, including stocks, mutual funds, bonds, and more.

The parents or guardians appoint an adult custodian for the account. The custodian holds all ownership rights over the child’s assets while managing them on their behalf. When a minor reaches legal age, they have full ownership of the account.

Examples of UGMA Accounts

Vanguard and Fidelity offer attractive UGMA account options.

A Vanguard UGMA account may include mutual funds, stocks, bonds, exchange-traded funds (ETFs), and more. There are no enrollment, transfer or advisor fees for self-directed clients. An advisor fee may apply to the custodian.

A Fidelity UGMA account has access to its full range of investments, including stocks, options, mutual funds, bonds, and fractional shares. There are no low-balance, annual, inactivity or maintenance fees.

UGMA Tax Rules

Tax due on interest and dividends from a UGMA account is not the same as from regular savings accounts.

Depending on state laws, additional taxes may apply if the total income surpasses certain thresholds. In other cases, you may qualify for a tax deduction. It’s important to consult with a tax expert before making any decisions.

UGMA Benefits

The benefits of a UGMA account are:

  • Simple to open: Opening a UGMA account is simple at any financial institution.
  • No contribution limits: You can deposit as much as you like in a UGMA account.
  • No withdrawal limits or restrictions: Withdrawal rules vary by state, but generally require written consent from the custodian and parent or guardian.
  • Flexibility: By utilizing a UGMA account, parents or guardians can benefit from tax advantages, creditor protection and greater control over the funds.
  • Allow parents to skip the trust process: Opening a UGMA account is more straightforward than starting a trust for a minor.
  • Assets automatically become the child’s property: When the minor reaches adulthood, they have complete control over their account assets to use however they prefer.

UGMA Disadvantages

The disadvantages of a UGMA account are:

  • Irrevocable: Custodians have full power to manage and utilize the funds in a UGMA account, with no transfer or sale capacity without authorization.
  • No tax benefits: UGMA accounts do not come with state or federal tax breaks, making them less attractive than other options.
  • Impact on college financial aid: If you’re saving for college, UGMA funds may adversely impact your eligibility for federal financial aid in your Free Application for Federal Student Aid.


There are key similarities and differences between the UGMA and the Uniform Transfers to Minors Act (UTMA).


  • The UGMA and UTMA both allow the legal transfer of assets to a minor without establishing a trust.
  • The UGMA and UTMA both allow minors to receive gifts of cash, securities, real estate and other assets.
  • The UGMA and UTMA both allow a custodian to manage the assets until the minor reaches the age of majority.


  • Under the UGMA, the assets transfer to the minor when they reach the age of majority, which is usually 18 years old. Under the UTMA, guardians can extend this age to 21.
  • The UTMA allows a broader range of assets, including real estate, patents and royalties, while the UGMA only permits cash, securities and insurance policies.
  • Under the UGMA, the custodian has less flexibility in managing the assets for the minor than under the UTMA.

UGMA vs. 529 Plans

There are key similarities and differences between the UGMA and 529 plans:


  • Both the UGMA and 529 plans are about saving money for a child’s education.
  • The child owns both accounts under the UGMA and 529 plans, and the money is for their benefit.
  • The UGMA and 529 plans offer tax advantages, but they vary.


  • Under the UGMA, a custodian manages the assets until the child reaches the age of majority, while the account owner of a 529 plan maintains control of the account and decides when to withdraw funds for educational expenses.
  • The UGMA allows a broader range of assets. But 529 plans allow cash, mutual funds or ETFs.
  • The child may use their UGMA funds for anything. But 529 plans are specifically for educational expenses.

How to Open a UGMA Account

Follow these steps to open a UGMA account:

  1. Research a brokerage firm: Some important factors to consider include fees, investment options, customer service and user interface.
  2. Set up a UGMA account for your child: Complete an application by giving details such as your and your child’s names, social security numbers, birth dates and more.
  3. Fund the account: You can transfer money from your bank account or rollover funds from another investment account.
  4. Start researching investments: UGMA accounts offer various options, including stocks, bonds, mutual funds and ETFs.

Are UGMA Accounts a Good Idea?

A UGMA account allows you to save money for your child’s education and other expenses. Setting up a UGMA account is a simple process. While UGMA accounts offer several advantages, there are also some drawbacks.

Whether a UGMA account is a good idea depends on your circumstances and financial goals. Consider the factors in this article and take steps to set up and manage a UGMA account that aligns with your goals.


What happens to a UGMA account when the child turns 21?

When a child turns 21, they become the legal owner of the assets in the UGMA account and may use the funds for any purpose they choose.

In some states the age of majority is 18.

How are gifts to minors taxed?

Gifts to minors may be subject to gift tax, but there are ways to avoid or cut these taxes. Consult a tax professional to determine the best strategy for your circumstances.

Where can I open a UGMA account?

You can open a UGMA account at many financial institutions, such as banks, credit unions, and brokerage firms.

What assets can a UGMA account hold?

A UGMA account can hold various assets, such as cash, stocks, bonds, mutual funds and more. These vary at different financial institutions.

I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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