Jump Starting Your Kids’ Investment Journey: Exploring UTMA/UGMA
Ann Garcia, CFP®
Head of Content & Author
Ann Garcia, CFP®
Head of Content & Author
Ann is a nationally recognized financial advisor and author who provides comprehensive financial planning and investment management advice to families, businesses, and individuals. She obtained her BA from the University of California, Berkeley, is a member of Phi Beta Kappa, and holds the Certified Financial Planner certification. Ann lives in Oregon with her husband and is the proud parent of two recent debt-free college graduates. In her free time, she enjoys running the Wildwood Trail and exploring Portland's vibrant food scene.
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir is the Founder, CEO, and Registered Investment Advisor Representative of Tobi. Prior to founding Tobi in 2023, he was a consumer financial services attorney in private practice for twelve years. He earned his BA in Economics from the University of Virginia and his JD (cum laude) from American University. He lives on a small farm outside Washington, D.C. with his wife and middle-school son, perfecting the art of keeping their alpaca, llama, horses, and sheep in a semi-perfect state of harmony. Their rescued alpaca became the inspiration for the company's mascot.
Transform their future—start them on the path to lifelong financial freedom.
A single $1,000 investment can grow to a million dollars over 72 years, assuming a 10% average annual growth.
But it would reach only $100,000 if allowed to grow for “only” 50 years.
In other words, you can basically fund the bulk of your child’s retirement with a single investment at birth!
You can try our Growth Calculator for yourself!
But the bottom line is always the same: the younger you start investing, the more wealth they can accumulate—and by a wider magnitude than you ever thought possible!
How young is too young? Warren Buffett—the world’s most successful investor—bought his first stock at age 11. But you can open one even for a newborn.
What is a UTMA/UGMA account?
A minor is not allowed to open their investment brokerage account. But anyone can open one and manage it on the minor’s behalf until they become an adult. And at that time—typically when they reach the age of 18 or 21—the legal ownership of the account automatically transfers into their name.
Those investment accounts are called custodial accounts and are also known as UTMA and UGMA accounts, depending on the state you live in. The person who opens the account is called the custodian, and the child becomes the beneficiary until they reach adulthood.
How do UTMA/UGMA accounts work?
Let's start with the basics. UTMA/UGMA accounts come with virtually no constraints on contributions. Anyone—be it a parent, a generous relative, or even a kind-hearted friend—can open an account on behalf of the child.
If someone gifts the child $19,000 or less per year (or $38,000 for married donors filing jointly), there’s usually no IRS paperwork. If a donor gives more than that to one person in a year, it often just means filing IRS Form 709—not paying gift tax—unless the donor exceeds the lifetime gift and estate tax exemption (about $15 million per individual in 2026).
So let’s entertain a fascinating scenario: a single $19,000 contribution invested at an average annual return of 10% could grow to $2 million in 50 years, but then reach a staggering $18 million if left undisturbed for 72 years instead. Talk about the magic of compound returns!
So the beauty of this account is that you can start investing early—even from birth. That’s it! But that’s a lot.
The Trade-offs
Of course, UTMA/UGMA accounts do come with some strings attached:
- No Tax Benefits: The investment growth is taxable when they sell the assets at a profit. Based on the current tax rate, long-term capital gains tax are typically taxed at a flat rate of 15% or 20%, depending on their income at the time they sell and take a profit. Earnings may also be subject to state and local taxes. And custodial accounts are subject to the “kiddie tax,” which means that investment gains over $2,700 are taxed at the parents’ income tax rate, not the child’s. But always remember that taxes are owed only when you sell the investments to book a profit. A mere appreciation of an investment doesn’t trigger a tax.
- Balance will count against college financial aid: Unlike 529s, which are considered assets of the parent, UTMA and UGMA accounts are considered assets of the minor. This means that in nearly all cases, 20% of the account’s value will be considered available to pay for college every year, increasing their expected contribution towards tuition and reducing the availability of financial aid. In contrast, parental assets in your name are assessed at a much lower rate, typically less than 6%. But this is not as terrible as it seems. Remember: most of the compounded growth accelerates and happens far off into the very last decade of growth, so their total assets by the time they’re 18 or 20 will not have had enough time to grow that much.
- Once money goes in, access is very limited until they become an adult. That’s because the money you or any other donor puts into the UTMA is a gift to the child, and as the custodian, you have a fiduciary (i.e., legal) responsibility to the child to ensure that they actually receive this gift when they become an adult. So while they are a minor, the money in the custodial account can only be used for the direct benefit of the child and not as a replacement for a parent’s support obligations. Keep records of any withdrawals and avoid treating the account like a personal emergency fund. So—only invest an amount that you know you won’t need—ever.
- You cannot change the beneficiary of the account to another minor or anyone else. Unlike 529 plans, you can’t change the beneficiary to the account—because it’s not yours. It’s the minor’s! It’s always considered their money—and their asset. You only open and manage it on their behalf. You can even make or collect gifts for that account, but you can’t transfer the ownership to a different person later.
- Once they reach adulthood, the funds transfer into their name automatically. The age at which they will gain control of the account varies by state, but is usually 18, 21, or 25. If the automatic transfer gives you heartache, you can open a Trust with an attorney for complete control over when and how the funds are used. But this may be a good opportunity to teach them valuable lessons about responsible investing.