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UGMA/UTMA 101: Introduction to financing a college education College costs increase annually by approximately double the amount of inflation. This staggering fact means that a bank savings account – paying 2-3% — is a totally inadequate vehicle for achieving the goal of paying for your child’s college education. According to the College Board, for the 1999-00 academic year the average total cost of a four-year public college education was $43,636 while a four-year private college education was $94,604. That means, for a child born today, in 18 years a four-year public college education is expected to cost $113,157. Among the best of the college savings investment vehicles permissible under Internal Revenue Service (IRS) regulations are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). 
What the UGMA and UTMA provideUGMAs allow the donor, often parents or grandparents, to give savings and securities including mutual funds, to a minor child without going to the trouble and expense of establishing a trust. UTMA accounts are similar and allow for the transfer of any personal property, including real estate, antiques, collectibles, etc. Custodians and account ownership A custodian – usually a parent or guardian – is named to exercise control of the account, including collecting, holding, investing and reinvesting the assets, until the minor-owner reaches the age of majority. Gifts to both UGMA and UTMA custodial accounts are irrevocable. Taxes on custodial accounts Taxation of custodial account earnings is dependent upon the minor’s age and the amount of income earned.* For minors under 14 years of age, the first $700 in investment income received by a minor in a single tax year is offset by the child’s standard deduction, while the next $700 is taxed at the child’s marginal tax rate. Beyond that, earnings are taxed at the parent’s/guardian’s marginal tax rate. For minors 14 years of age and older, all income is taxed at the minor’s marginal tax rate. Time and compounding – an investment’s greatest allies Compounding and regular investing can enhance the effectiveness of your overall UGMA/UTMA investment. Time is critical. The sooner you begin contributing – even small amounts – the sooner your investment can begin growing and reinvesting earnings. For more information about UGMA and UTMA accounts, and the ABC Investment Plan,® call 1-800-US-FUNDS to speak with an investor representative. You can also download a custodial account kit (which includes an application and a prospectus) from our website. A program of regular investing doesn’t assure a profit or protect against a loss in a declining market. You should evaluate your ability to continue in such a program in view of the possibility that you may have to redeem fund shares in periods of declining share prices as well as in periods of rising prices. To learn more about our funds or to request a prospectus, which includes charges and ongoing expenses, please click here or call 1-800-US-FUNDS. Please read the prospectus carefully before you invest or send money. *Investors should know that the rules for UGMA/UTMA accounts and the legal age of each minor will vary by state. UGMA/UTMA accounts may affect a child’s eligibility for college financial aid. |
