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Do you have a savings account for your child at the bank? If so, did you know that you could have that money invested and potentially earning much more than the interest rate that the bank offers? You can! Since savings interest rates at banks are typically pretty low, it is definitely beneficial to have the money invested instead.

How to Invest for Kids

The Uniform Transfers to Minor Act (UTMA) allows minors to receive gifts (i.e. money) and with the UTMA account there is an adult custodian, typically the parent or legal guardian, that manages the account until the minor is of legal age, usually 18, 21, or 25, depending on the state.

This is likely similar to what you have at the bank; you opened an account for your child and you are the custodian, which means you are managing the funds until they are of legal age. The main difference between opening this account at the bank versus having it invested in a brokerage account is the performance. At the bank, you earn the interest based on the interest rate the bank is offering at the time. When it’s invested in a brokerage account you get to capitalize on the earning potential of the stock market by investing the money in mutual funds.

How the UTMA Account Works

In an UTMA Account, the money that is deposited into the account is an irrevocable gift to the minor, which means that the money has to be used for the child’s benefit. One difference between the UTMA and a college savings account such as a 529 or ESA is that the UTMA can be used for college but it doesn’t have to be. The money in the UTMA account can be used for anything that is for the child’s benefit. For example, this money could be used to purchase their first car or for a down payment on their first home.

You do have to pay taxes on the growth of the UTMA Account, or the “unearned income” that comes from the interest and/or performance from the investments. However, that doesn’t happen right away because the taxes are applied on a sliding scale:

  • The first $1,050 of unearned income in the UTMA is tax-free.

  • The next $1,050 of unearned income in the UTMA is taxed at the child’s tax rate.

  • Any unearned income above that $2,100 is taxed at the custodian’s tax rate.

There are no withdrawal penalties. Once the minor reaches the legal age, they are granted full access to the money in their UTMA account.

If a child applies for college financial aid, the money in the UTMA account does need to be listed as an asset on the FAFSA.

Key Take-Aways

To recap, here are the key take-aways of the UTMA Account:

  • The money in an UTMA Account CAN be used to pay for college but it doesn’t have to be. It can be used for anything for the child’s benefit.

  • Brokerage UTMA Account = the money can be invested. UTMA Account at the bank = savings interest rate.

  • There are no withdrawal penalties.

  • There is an adult custodian that manages the account until the minor is of legal age.

  • Sliding scale for how unearned income is taxed.


If you have questions about how to open an UTMA Account and/or want to discuss this more, we would be happy to talk with you. You can meet our team of Financial Planners and reach out to one of us HERE.


May 14, 2020

Amanda Sharratt

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