A UGMA account is a way for an adult to hold money and investments in a minor's name, with the adult managing it until the child reaches a set age

UGMA stands for Uniform Gifts to Minors Act. It is a legal structure that lets a parent, grandparent, or other adult put money, stocks, bonds, or mutual funds into an account registered under a child's name. The adult—called the custodian—controls the account and makes all decisions about how the money is invested or spent until the child reaches the age of majority, which is usually 18 or 21 depending on your state.

The key difference from a regular savings account in the parent's name is that the money legally belongs to the child from day one. The child's Social Security number is on the account, not the parent's. This matters for taxes, for what happens if the parent dies, and for what the child can do with the money once they turn 18 or 21.

UGMA accounts are common for college savings, inheritances, gifts from grandparents, and money set aside for a child's future. They are straightforward to open—most banks and investment firms offer them—and they cost nothing to maintain.

Key Takeaways

  • The money in a UGMA account belongs to the child, but the adult custodian controls it and decides how it is invested until the child reaches 18 or 21.
  • The account uses the child's Social Security number, which means the child pays taxes on any earnings above a small annual threshold, usually at a lower tax rate than the parent would pay.
  • Once the child reaches the age set by your state's law, the account transfers to them automatically—they own it outright and can spend it however they want.
  • UGMA accounts can hold cash, stocks, bonds, mutual funds, and some other investments, but not real estate or certain other assets.
  • Money in a UGMA account counts as the child's asset when determining financial aid for college, which can reduce the amount of aid they receive.

How the account is set up and who can open one

To open a UGMA account, you need the child's Social Security number, a government ID, and proof of address. You can open one at most banks, credit unions, and investment firms like Fidelity, Vanguard, or Charles Schwab. Some brokerages have online applications that take 10 to 15 minutes.

The adult who opens the account is the custodian. You can name only one custodian per account, though some states allow you to name a successor custodian who takes over if the first one dies or becomes unable to manage the account. The custodian does not have to be a parent—grandparents, aunts, uncles, or family friends can open a UGMA account for a child.

There is no minimum deposit required, though some institutions set their own minimums (often $25 or $100). You can add money to the account at any time, and there is no annual limit on how much you can contribute, though gifts over a certain amount per year may trigger federal gift tax reporting—currently $18,000 per person per year as of 2024, though this changes annually.

What you can hold in a UGMA account and how it grows

UGMA accounts can hold cash, stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Some brokerages also allow options trading or cryptocurrency, depending on the firm's rules. You cannot hold real estate, life insurance, or certain other assets in a UGMA account.

The money grows through interest (if it is in a savings account or money market fund), dividends (if it is in stocks or funds), or capital gains (if the value of stocks or funds rises). All of that growth belongs to the child and is taxed in the child's name, not the parent's. This is often a tax advantage: a child typically pays little or no federal income tax on the first $1,300 or so of investment income per year (the exact threshold changes annually), while a parent would pay tax at their higher rate.

The custodian decides how the money is invested. You might keep it in a savings account earning interest, buy individual stocks, invest in index funds, or use a mix. The custodian can also move money between investments within the account without triggering taxes, as long as the money stays in the account.

What happens when the child turns 18 or 21

The age at which the child takes control of the account depends on your state's law. Most states set it at 18, but some allow you to choose 21 when you open the account. A few states have different rules for different types of assets.

When the child reaches that age, the account transfers to them automatically. They become the owner and can withdraw all the money, spend it however they want, or leave it invested. The custodian has no say in what happens next. This is a real consideration: if you open a UGMA account for a 10-year-old intending to save for college, and the child turns 18 and decides to buy a car instead, that is legally their choice.

Some families use a different structure—a 529 college savings plan or a Coverdell Education Savings Account—if they want more control over when and how the money is used. Those accounts have restrictions on withdrawals, whereas a UGMA account does not.

How UGMA accounts affect financial aid and taxes

Money in a UGMA account counts as the child's asset when you fill out the Free process for Federal Student Aid (FAFSA). The formula assumes the child will contribute a larger percentage of their assets toward college costs than the parent would. This can reduce the amount of federal financial aid the child receives. The impact varies depending on the total amount in the account and the family's other assets and income.

For taxes, the child files a tax return if their investment income exceeds the annual threshold (currently around $1,300 for unearned income). The first portion of income is taxed at the child's rate, which is usually zero or very low. Income above that threshold may be taxed at the parent's rate under the "kiddie tax" rules, which explore to children under 24 in most cases. This is still often better than holding the money in the parent's name, where all investment income would be taxed at the parent's rate.

The custodian can withdraw money from the account for the child's benefit—for education, medical care, or other needs—without triggering taxes on the withdrawal itself. The withdrawal does not count as income to the child. However, the custodian cannot use the money for things the parent is already legally required to provide, like food or housing.

UGMA versus UTMA and other account types

UTMA stands for Uniform Transfers to Minors Act. It is similar to UGMA but allows a wider range of assets, including real estate and intellectual property. Not all states have UTMA laws; some use only UGMA, and some allow both. If you are opening an account, the financial institution will tell you which option is available in your state.

A 529 plan is a tax-advantaged savings account specifically for education expenses. Money grows tax-free if used for tuition, fees, room and board, or books. If you withdraw money for non-education purposes, you pay taxes and a 10% penalty on the earnings (though not the contributions). The account owner—usually the parent—keeps control even after the child turns 18.

A Coverdell Education Savings Account works similarly to a 529 but has lower contribution limits and more investment flexibility. A regular custodial brokerage account is also an option at some firms; it functions like a UGMA but may have different rules about when the child takes control.

What the custodian can and cannot do with the money

The custodian can withdraw money from the account for the child's benefit. This includes education, medical care, extracurricular activities, or other expenses that directly benefit the child. The custodian cannot use the money for things they are already legally required to provide—for example, you cannot withdraw money to pay for groceries or rent and count that as a benefit to the child.

The custodian cannot borrow money from the account or use it as collateral for a loan. They cannot transfer the account to themselves or change the beneficiary. If the custodian dies, the account does not go through probate; it passes directly to the child or to the successor custodian you named when you opened the account.

The custodian has a legal duty to manage the account prudently and in the child's best interest. This means avoiding overly risky investments or investments that primarily benefit the custodian. In practice, most custodians invest conservatively—in index funds, target-date funds, or savings accounts—and the law gives them broad discretion as long as they are acting reasonably.

Frequently Asked Questions

Can I change my mind and take the money back after I put it in a UGMA account?

No. Once money is in a UGMA account, it legally belongs to the child. You cannot withdraw it for your own use or change your mind about the gift. You can only withdraw it for the child's benefit. This is a permanent transfer, so think carefully before opening the account.

What happens to a UGMA account if the custodian dies?

The account passes to the successor custodian you named when you opened it, or directly to the child if no successor was named. The account does not go through probate. If you did not name a successor, the court may appoint one, which can cause delays.

Does a UGMA account affect my child's ability to get financial aid for college?

Yes. Money in a UGMA account is counted as the child's asset on the FAFSA, which typically reduces the amount of need-based financial aid they receive. The impact depends on how much is in the account and the family's overall financial situation. Merit-based scholarships are not affected.

Can I open a UGMA account for a grandchild or niece?

Yes. You do not have to be a parent to open a UGMA account. Grandparents, aunts, uncles, and other relatives can open one. The rules about what the custodian can do with the money are the same regardless of the relationship.

What is the difference between a UGMA account and just putting money in a savings account in my child's name?

A UGMA account is a legal structure that makes clear the money belongs to the child and gives you authority to manage it until they reach 18 or 21. A savings account in the child's name without UGMA is simpler but does not have the same legal protections, and the child can access it once they turn 18 without any waiting period or transfer process.