A UGMA account lets an adult hold and manage money or investments for a minor, with the money legally belonging to the child

UGMA stands for Uniform Gifts to Minors Act. It is a legal structure that lets you (a parent, grandparent, or other adult) open an investment account in a child's name and manage it until they reach a certain age — usually 18 or 21, depending on your state. The money in the account belongs to the child from day one, not to you, even though you are the one making decisions about it.

The main reason people use UGMA accounts is to save for a child's future while getting some tax advantages. Money grows in the account, and the child pays taxes on the earnings at their own (usually lower) tax rate rather than yours. When the child reaches the age of majority in your state, they take control of the account and can use the money however they want.

Think of yourself as a temporary manager. You decide where the money goes — into stocks, bonds, mutual funds, or even cash — but you cannot use it for yourself, and you cannot take it back. Once you put money in, it is the child's asset.

Key Takeaways

  • A UGMA account is opened in the child's name and belongs to them legally, even though you manage it until they reach 18 or 21.
  • You choose the investments, but the money must be used for the child's benefit — not for your own expenses or bills.
  • The child pays taxes on earnings at their own rate, which is often lower than yours, saving the family money on taxes.
  • When the child reaches the age set by your state law, they take full control and can spend the money on anything, including things you might not approve of.

How a UGMA account differs from a regular savings account

A regular savings account in a child's name is just a place to hold cash. A UGMA account can hold investments — stocks, bonds, mutual funds, exchange-traded funds (ETFs) — and is designed to grow over time. The account also has legal protections: the money cannot be touched by creditors if the child is sued, and it does not count against you if you ever need to explore for certain government programs.

Another key difference: money in a regular account is still your asset if you put it there. Money in a UGMA account is the child's asset from the moment you deposit it. This matters for taxes, for financial aid calculations, and for what happens if you pass away.

Who can open a UGMA account and what you need

You can open a UGMA account if you are an adult (18 or older) and you have a relationship to the child — parent, grandparent, aunt, uncle, or even a family friend. You will need the child's Social Security number and your own. Most banks and investment firms offer UGMA accounts, including major brokerages like Fidelity, Charles Schwab, and Vanguard, as well as many local banks.

The process is straightforward: you contact the bank or brokerage, tell them you want to open a UGMA account, and they will walk you through the paperwork. You will name yourself as the custodian — the adult managing the account. Some states use UTMA (Uniform Transfers to Minors Act) instead of UGMA; the difference is minor, and most institutions treat them the same way.

How money grows in a UGMA account and who pays taxes

Money in a UGMA account grows through investment earnings — dividends from stocks, interest from bonds, or gains when you sell an investment for more than you paid. The child is responsible for paying taxes on those earnings, not you. For 2024, a child can earn a small amount of investment income (the exact amount varies by year) before owing any federal income tax at all.

This is where the tax advantage comes in. If you held the same investments in your own name, you would pay taxes at your rate, which is likely higher. By putting money in the child's name, you shift the tax burden to someone in a lower bracket. However, if the child's earnings are very high, they may pay a higher rate called the "kiddie tax," so this strategy works best for moderate growth.

You do not file a separate tax return for the UGMA account. The child's earnings are reported on their own tax return (or yours, if they are very young and have no other income). Your tax professional or the brokerage can explain the specifics for your situation.

What happens when the child turns 18 or 21

The age at which the child takes control depends on your state law. In most states it is 18, but some allow you to choose 21 when you open the account. Once they reach that age, the account is theirs to manage and spend however they wish — college tuition, a car, travel, or anything else. You lose all control and all say in the decision.

This is a real consideration. If you are saving for college and the child decides at 18 to take the money and travel instead, there is nothing you can do about it. Some families use a different structure, like a 529 college savings plan, if they want more control over how the money is used. Others accept this as a trade-off for the tax benefits and legal protections of a UGMA account.

UGMA accounts and financial aid for college

Money in a UGMA account counts as the child's asset when you fill out the Free process for Federal Student Aid (FAFSA). This means it can reduce the amount of need-based financial aid the child receives. The impact varies — the formula counts student assets more heavily than parent assets — but it is something to understand before you open the account.

If you are planning to pay for college with savings, a 529 plan (which is owned and controlled by you, not the child) may be a better choice because it has less impact on financial aid. A UGMA account makes more sense if you are saving for something other than college, or if you want the child to have control over the money once they turn 18.

Rules about how you can use UGMA money

The money in a UGMA account must be used for the child's benefit. This includes obvious things like education, medical care, and living expenses. It does not include things that are your legal responsibility as a parent — like basic food, housing, or clothing that you would provide anyway. The line can be fuzzy, but the rule is: you cannot use UGMA money to pay for things you are already obligated to provide.

You also cannot borrow from the account or use it as collateral for a loan. If you do, you are breaking the law and may have to repay the money out of your own pocket. The account exists for the child, and the law takes that seriously.

Frequently Asked Questions

Can I change my mind and take the money back?

No. Once money is in a UGMA account, it belongs to the child legally. You cannot withdraw it for yourself or reverse the gift. If you need the money for an emergency, you have no legal right to it. This is why you should only put money into a UGMA account if you are certain you can afford to give it away.

What if the child never uses the money?

The account stays open and the money remains there. When the child turns 18 or 21, they can leave it invested, move it to their own account, or spend it. There is no important date to use the money, and no requirement that they use it for any particular purpose once they have control.

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

Yes. You do not have to be the parent. Any adult can open a UGMA account for any minor. However, once the child reaches the age of majority, they take control, so make sure you are comfortable with that outcome before you open the account.

Is a UGMA account the same as a 529 plan?

No. A 529 plan is owned by you and must be used for education. A UGMA account is owned by the child and can be used for anything once they turn 18. A 529 also has better financial aid treatment. Choose based on whether you want to keep control and restrict how the money is used.

What happens to a UGMA account if I die?

The account belongs to the child, so it passes to them or to a guardian you name. It does not go through your will or your estate. If you name a successor custodian when you open the account, that person takes over managing it until the child reaches the age of majority.