The biggest worry of every parent is to make sure their children’s future is secured when they grow up. This means ensuring they have good health, sufficient money to pay for the college, and social support. One of the ways to ensure they have solid financial footing, and are able to pay for the college is by putting away savings from the early age such that when they grow up they have sufficient money in the bank to pay for higher education. If your child can graduate from the college without any debt, it will give them a head start in their life without having the financial burden.
What is UGMA Account?
One of the ways to start saving for children at an early age is by opening a UGMA account. UGMA stands for Uniform Gift to Minor Act. UGMA is a custodial account, which means that an adult manages it on behalf of the child. The account still belongs to the child, but it is funded and managed by a custodian, usually a parent. The money in the UGMA account belongs to the child in whose name the account is established. When the child turns adult at the age of 18 or 21, depending on the state, he can claim the account as his own. The account is usually funded by a parent or grandparent with after tax money. You can invest the money in the UGMA account in securities such as stocks, bonds and mutual funds.
Why You Should Open UGMA account?
UGMA account provides an excellent opportunity for the parent to start saving money early on so that their children can access it when they become adult. It also enables them to grow the money by investing in securities, which typically provide higher return compared to keeping the money in the bank. The compound interest generated by investing the money in securities means the child will have significant savings when they become adult even if you start with small savings at an early age. While UGMA account provides excellent opportunity to save money for college they don’t have to use it for the education expense. The money in the account can be used for any other expense such as wedding, house, car, etc.
What to Watch Out for When Opening UGMA Account?
There are certain caveats you should be aware of when opening a UGMA account. First, once you put the money in the account it becomes the child’s property. You cannot revert it back. Also, the money deposited in the account comes after you have paid the taxes on it. You do not get any tax benefits unlike 529 plan, which is used for college savings. You are also required to pay the taxes on the growth of the money in the account every year, although it is taxed at child’s tax rate, which is usually lower. Finally, the most important thing to keep in mind with UGMA account is that it can have an impact on the amount of financial aid your child can receive when they go to college. This is because this money is considered child’s asset which is used to calculate the amount of financial aid he will get.
Conclusion
UGMA account provides excellent opportunity to grow the money in your child’s name by saving small amount on a regular basis at an early age. This ensures that he will have a secured financial future when he becomes an adult.
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