General Investing Accounts for Minors

UGMA/UTMA accounts are simple to set up and can invest in virtually any asset, including mutual funds, stocks, and bonds.

These accounts have an adult custodian (you, or whomever you designate) who controls the money—how it is invested and spent—until the child reaches the age of majority or the custodianship terminates. The legal age in most states is 18 or 21, although some states allow UTMA custodianships to continue to age 25.

Gifts and transfers to minors are irrevocable. The funds must be spent to benefit the child, and donors are prohibited from ever taking the money back for other uses or for another child. When the custodianship terminates (usually your state’s age of majority), the money must be turned over to the former minor—to use as he or she sees fit.

Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child’s—usually lower—tax rate, rather than the parent’s rate. For some families, this savings can be significant.

Because the money in a custodial account is your child’s asset and not yours, be aware that UGMA/UTMA assets potentially can have a significant impact on the financial aid package the student receives. The federal financial aid formula typically requires a student to contribute more of his or her total assets to college costs each year (up to 35%), whereas parents are expected to contribute less, at most 5.6% of their assets..