A UGMA or UTMA is a law that gives an adult the ability to create a custodial account in a minor’s name and contribute to it without having to name a legal guardian. It’s similar to a trust because it holds and protects assets, but custodians and parents won’t be able to insert any stipulations on how they’d prefer the funds to be used once the child turns of age.
According to Corey, withdrawals from the account are the same as those for 529s—there is no penalty for distributions that benefit that young adult. She also mentions that families get a Kiddie Tax credit every year; unearned income gets taxed at the child’s tax bracket up to a certain amount, then after that the income is taxed at the parent’s bracket.
In its blog, the wealth management firm Walsh & Associates writes that the only way to avoid the unearned income getting taxed at the parent’s bracket is if the young adult (under the age of 24) earns a salary that provides more than half his or her support.
Whatever a family chooses, knowing the tax implications and the most appropriate methods to withdraw from any college savings vehicle will save those involved from experiencing unnecessary stress.