One of the investment accounts that you can open for a minor and build wealth is a UTMA.
I wanted to discuss it a bit, cover some of the drawbacks, and discuss a unique tax strategy that you can use in these accounts.
First, a UTMA is a custodial account.
When a UTMA account is opened, an adult custodian (parent or grandparent) manages assets (like stocks/ETFs) on behalf of a minor (could be anyone, son, daughter, cousin, etc)
You can open this account with Fidelity, Vanguard, or any other custodian.
But before you do, let me cover some important basics:
Contributions
Anyone can contribute to this custodial account. You don’t even have to be a family member.
The contributions are treated as gifts. This means that individuals can contribute up to $19,000 (or $38,000 for a married couple) per year without triggering any gift tax implications or filing requirements.
Important: These contributions are irrevocable gifts. This contribution and subsequent growth of the account legally belong to the child. Your child also likely wouldn’t even be able to give their consent due to legal age requirements.
Transfer
Depending on the state law, you are legally required to transfer the account to the beneficiary when they turn 18-25.
In Illinois, a UTMA account is typically transferred to the beneficiary when they reach the age of 21.
But North Carolina permits specifying an age between 18 and 21.
Financial aid
Since the child legally owns the assets inside of the UTMA, it could cause a reduction in financial aid when they enter college.
This is because assets held by a child typically count much more heavily than parental assets related to scholarships. This doesn’t necessarily mean that these accounts are inherently bad, but just something to be aware of.
Ownership
The account you open belongs to the child. You can’t just change a beneficiary on it like with a 529 plan.
Taxes & Strategy
One of the important things is that the income of a custodial account is taxed to the child.
For example, say you bought $10,000 worth of VTI in this custodial account. Your child will receive ~$120 of dividends in a year.
This $120 of income is taxed to the child, not you. However, your child might not pay any federal taxes:
If your child doesn’t have any earned income (like wages), then in 2025, your child gets a standard deduction of $1,350. The next $1,350 is taxed at the child’s rate (0% for qualified dividends, 0% for long-term capital gains, 10% for interest and non-qualified dividends).
The rest, if any, is taxed at the parent’s rate (also called “kiddie tax”)
This also means that if a child receives unearned income (like dividends or interest) of under $1,350, no tax return has to be filed for the child.
If it’s more than that, a tax return needs to be filed.
For example, in our example, the $120 of dividend income is below $1,350, so no federal taxes or tax return need to be filed.
Important: Your state might require your child to file a tax return depending on the income amount received from the UTMA account. For example, Illinois has a $2,775 base exemption, so no taxes will be due in our example, but it’s important to check your state.
Tax Gain Harvesting
A great strategy to use for UTMA is tax gain harvesting.
Since $1,350 is the standard deduction, and the next $1,350 is taxed at 0% if it’s a long-term capital gain, this effectively means that you can harvest $2,700 every year and pay $0 in federal taxes.
For example, say you bought $10,000 of Netflix stock for your child. No dividends, so a simple calculation in this example.
If the Netflix stock is now worth $11,000, once you sell it, your gain is $1,000. You can then immediately buy back the stock (remember wash sale rules don’t apply to gains).
Since it’s less than $1,000, you don’t have to file or pay any child’s taxes at the federal level.
What if state tax applies?
If it does, it’s best not to do this strategy, because the opportunity cost on tax payment is large.
I would harvest up until the state’s exemption.
Effectively, over your child’s ~15 years, you can harvest ~$30,000 of gains.
You can also do tax loss harvesting when the market is down.
Is UTMA worth it?
Due to the lack of transferability, control, and financial aid, it’s generally recommended to prioritize a 529 plan first.
But UTMA could be a good diversification tool, especially if you teach the value of financial literacy to the beneficiary.