Children & Money

As a parent and investment manager/planner, I want to teach my children good money habits. It can be relatively straightforward to teach them what to do, but actually setting up accounts for children, it can be difficult and confusing.

Probably the most talked about account type is the Education Savings Account or 529 plan. These types of accounts were initially created to cover college tuition and expenses, and recent law changes allow savers to use up to $10,000 per year for pre-college education. Either way, the flexibility to use the money is somewhat restricted for education, and parents/account owners to be careful to use the funds properly or face taxes and penalties. However, this can be a great vehicle to save ahead of time for college and have the funds grow tax free.

The second account type for minors that I wanted to focus on is the UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account. With this account type, minors can save money for themselves with a custodian (usually a parent) managing the money until the child reaches the age of majority (in most states, that means turning 18). Again, these accounts are a great way for minors to save, and the growth is reported under their social security number, so the tax is usually very little or none in many cases.

From article by Stephen Fishman:

“For 2018 through 2025 children’s unearned income is not taxed at their parents’ income tax rates. Instead, all net unearned income over a threshold amount–$2,200 for 2019–is taxed using the brackets and rates for trusts and estates. The 2019 rates are shown in the following chart:


Kiddie Taxable Unearned IncomeTax Rate
up to $2,60010%
$2,601 to $9,30024%
$9,301 to $12,75035%
all over $12,75037%”


I have seen some issues arise with these types of accounts, however. Most notably, once funds go into a UTMA account, the money legally belongs to the child and can only be used for his or her benefit. So, getting money back out of a UTMA account can be a little bit cumbersome. And, if the parent that may have funded the account initially cannot “take back” the money if an emergency need arises for purposes other than benefitting the child. Our custodian (the company that holds our client’s money) at Meridian is Charles Schwab, and Schwab (like most banks) requires that the custodian sign a withdrawal form that explains what the money is to be used for.

The other and possibly biggest issue in my mind is that the money become the child’s at age 18 (in most cases) no matter that child’s situation in life. Maybe he or she is struggling with addiction or is just bad at saving money, and the parent doesn’t what the child receiving a windfall at such a young age. Unfortunately, the parent wouldn’t have any choice and any deposits/withdrawals would have to be initiated by the now-adult.

So, be mindful of what your and your child’s goals are when establishing these types of accounts. Each account type has their benefits, but there can be some unforeseen drawbacks as well.

For example, if my daughter ever looks like this in a photo as an adult, I would not want her to be receiving large amounts of money at age 18!




Thank you to Life Touch for capturing my lovely daughter’s personality!

Categories : Financial Planning

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