What is a UGMA anyway?

The Uniforms Gifts to Minor Act is a savings vehicle that allows anyone to contribute money to an account that is established in the name of the minor usually under the age of 18 or 21 for most states. The custodian, usually a parent or guardian, is responsible for managing the account until the minor reaches the necessary age of majority under state law. The money is contributed after taxes and the earnings do not grow free from federal income taxes. The earnings are subject to federal income taxes and capital gains tax. There are also ‘kiddie’ tax rules that apply. The money contributed is considered a gift to the minor. Although the earnings are not tax free there are some other benefits. Anyone can contribute to this type of account, there are no income restrictions, and if the child is under the age of 19 years or a full time college student under the age 24 the first $900 of investment income is not taxable in a single year. The next $900 of investment income is taxed at the child’s tax rate. The downside is that any investment income over $1800 is then taxed at the parent’s tax rate. When the minor turns 19 or is no longer a full time student under 24 years old all the investment income becomes taxable at the child’s tax rate. When the funds are withdrawn they should be for the benefit of the minor excluding normal parent expenses such as food, clothing, and shelter. Withdrawals can be for almost anything for example education, a wedding, or a vehicle for school. To compare the UGMA to other similar savings vehicles to determine if this option may be suitable visit http://www.savingforcollege.com/ to utilize the compare savings options tools.