Uniform Gift to Minors Act (UGMA)
Uniform Transfer to Minors Act (UTMA)
Too many investors
overlook the impact of taxes. You may be thrilled with how your investment
returns look on paper, only to end up writing a huge check to Uncle Sam
on April 15th. You wouldn't want the same thing to happen to your child's
college education fund. That's why it pays to consider the benefits of
a custodial account under the Uniform Gift to Minors Act (UGMA) or Uniform
Transfer to Minors Act (UTMA). Any money you contribute to an UGMA or
UTMA is, by law, an irrevocable gift to your child. In other words, the
money will belong to your child alone when he or she reaches the age of
legal adulthood. You, however, serve as the custodian of the assets in
an UGMA or UTMA until your child reaches that age.
What makes an UGMA
or UTMA such a worthwhile way to save for college? Under most circumstances,
most or all of the income (which includes dividends, interest and realized
capital gains) that your child earns in this account will be taxed at
a lower marginal tax rate than your own - or not taxed at all. Income
tax law provides that children under the age of 14 do not have to pay
federal income tax on a significant share of their earned income. Although
there are some ceilings on the amount of tax-free earned income a child
can make in a year, any additional income is usually taxed at the child's
low marginal tax rate.
In addition, each
parent and grandparent can contribute up to $10,000 to a child's UGMA
or UTMA per year without having to pay a federal gift tax. Consult your
tax advisor for more information about how an UGMA or UTMA may fit into
your investment plan.
New Options
Washington recently
introduced several new tax-advantaged ways to save for college:
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