Saving for College for Your Child? Consider UGMA/UTMA Accounts

 In Personal Finance

saving for collegeIt should go without saying that having a child comes with some costs. However, usually, one of the biggest is the price of college tuition. If you want to help your child afford this type of education, a UGMA/UTMA account is probably one of your best bets.

What Are UGMA/UTMA Accounts?

Two investment tools you should definitely know about when it comes to saving for your child’s college education are UGMA/UTMA accounts. The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are both custodial accounts that you can basically set up on behalf of your child.

Any money you put into these accounts—or any other type of asset for that matter—will be turned over to them when they turn either 18 or 21 (laws are different by state).

The Tax Benefits of UGMA/UTMA Accounts

One huge benefit of UGMA/UTMA accounts is that they can generally work to your advantage when it comes to taxes. Recall that we said all different types of assets could be put in UGMA/UTMA accounts for your child. Well, you may wish to do this to eliminate them as a tax burden, while your son or daughter most likely sits in a much lower tax bracket.

Make sure you speak with a professional before going ahead with this just to make sure there aren’t extenuating circumstances that could come back to bite you. For a lot of people, though, these accounts are fantastic come tax season.

Irrevocability as a Benefit

Another benefit of these accounts that doesn’t always get the attention it deserves is their irrevocability. To put it simply, once you put money into either a UGMA or a UTMA, you can’t take it back out. The contribution is irrevocable.

A lot of people appreciate this aspect of these funds because they don’t even want to deal with the temptation of taking the money back out. They like knowing it’s completely off limits once it’s been set aside, ensuring that no unforeseeable event could possibly hurt their child’s ability to attend college.

Using Bonds as a College Fund

If you want, you can contribute to a UGMA or UTMA by simply putting money into these accounts, just like you would with a checking or savings account.

However, you could also use any other investment vehicle out there. Traditional options like stocks, ETFs and mutual funds are a bit unrealistic though. A lot can happen between now and the time your child becomes old enough to go to college. Only individual bonds are really designed to ride out the kinds of fluctuations that will take place.They don’t just provide predictable returns either. Thanks to the power of compounding the years ahead will work to your advantage by taking even very small amounts and turning them into significant returns that could end up paying for all of your child’s college tuition.

Saving for college doesn’t need to be overly difficult or expensive. Now that you know what a UGMA/UTMA can do, it should be obvious that they are excellent for making college an affordable option.

 

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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