UGMA vs UTMA Account: What’s the Difference and Which Should You Open?

UGMA vs UTMA — two acronyms that look nearly identical but carry some meaningful legal differences. If you’re setting up an investment account for a child, understanding these distinctions will save you surprises later. We’ve broken down exactly how they differ, when each matters, and which brokerages offer the best custodial accounts.

What Are UGMA and UTMA Accounts?

Both are custodial accounts — investment accounts held in a child’s name but managed by an adult (the custodian) until the child reaches the age of majority. They were created under two different uniform acts passed by most states:

• UGMA = Uniform Gifts to Minors Act (older law, more restrictive)
• UTMA = Uniform Transfers to Minors Act (newer law, broader asset types)

In our research, the key difference comes down to what you can put in the account and when the child receives it.

What Can Each Account Hold?

Asset Type	UGMA	UTMA
Cash	✅	✅
Stocks & ETFs	✅	✅
Mutual Funds	✅	✅
Bonds	✅	✅
Real estate	❌	✅ (in most states)
Intellectual property	❌	✅ (in most states)
Partnership interests	❌	✅ (in most states)

When Does the Child Gain Full Control?

This is where it gets state-specific:

• UGMA: The child gains control at 18 in most states
• UTMA: Transfer age varies by state — typically 18, 21, or 25 depending on the state

Some states allow UTMA accounts to delay transfer until age 25, giving parents more time before handing over significant assets. Once the transfer age is reached, the funds are legally the child’s — there’s no way to restrict access.

Tax Treatment: The “Kiddie Tax”

Both UGMA and UTMA accounts are subject to the same federal tax rules. In 2024:

• First $1,300 of unearned income (dividends, interest, capital gains): tax-free
• Next $1,300: taxed at child’s rate (typically 10%)
• Above $2,600: taxed at the parent’s marginal rate (the “kiddie tax”)

This matters if you’re holding dividend-paying stocks or selling appreciated assets. High earners may find the tax benefit diminished.

Financial Aid Impact

Both account types are treated identically by the FAFSA — as a child’s asset, counted at 20% in the Expected Family Contribution calculation. This is significantly higher than a 529 plan (counted at 5.64% as a parent asset). If financial aid eligibility matters to you, this is worth considering.

Which Should You Choose?

For most investors, the practical answer is simple: open a UTMA. It does everything a UGMA does, plus allows additional asset types. The only reason to use a UGMA is if your state doesn’t offer UTMA accounts (a small number of states are UGMA-only).

The more important question is whether a custodial account is the right vehicle at all — if your primary goal is college, a 529 plan offers tax-free growth and better financial aid treatment.

Best Brokerages for Custodial Accounts

Fidelity

Fidelity’s custodial accounts have no fees, no minimums, and access to their ZERO expense ratio index funds. Strong educational resources and a clean interface. Our top pick for most families.

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Schwab

Charles Schwab offers custodial accounts with excellent customer service and a wide range of investment options including ETFs, mutual funds, and individual stocks. No annual fees.

M1 Finance

M1’s custodial accounts support their pie-based automation — great if you want to set up an automatic investment plan and forget about it. Minimum is $100 for custodial accounts.

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Frequently Asked Questions

Can I take money out of a UGMA/UTMA account?

As the custodian, you can make withdrawals, but only for the benefit of the child. You cannot use the funds for your own expenses. This is a fiduciary responsibility — misusing custodial assets can have legal consequences.

Can I change the beneficiary on a custodial account?

No. Once assets are placed in a custodial account, they irrevocably belong to the child. You cannot transfer them to a different child or take them back. This is different from a 529, where the beneficiary can be changed.

Does a UGMA/UTMA account affect college financial aid?

Yes — custodial accounts are treated as the student’s asset by the FAFSA, counted at 20% in the EFC calculation. Compared to a parent-owned 529 (counted at 5.64%), this can significantly reduce financial aid eligibility for large balances.

What happens to the account if the child dies?

If the minor beneficiary dies before reaching the age of majority, the assets typically pass through their estate. This is generally handled via their parents as heirs, but the specific outcome depends on state law and whether a will exists.

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