How to Withdraw Money From a UTMA Account

The Uniform Transfers to Minors Act (UTMA) provides a structured way to hold and manage assets for a minor without the complexities of establishing a formal trust. These accounts enable adults to transfer various assets, including cash, securities, and real estate, directly to a minor. The primary purpose of a UTMA account is to facilitate wealth transfer and investment for a child’s future needs.

Key Considerations Before Withdrawing Funds

Before any funds are withdrawn from a UTMA account, understanding the foundational principles governing these accounts is important. A custodian, typically an adult, is appointed to manage the assets within the UTMA account. This custodian carries a fiduciary duty, meaning they are legally and ethically obligated to manage the funds prudently and exclusively for the minor’s benefit, never for personal gain.

Permissible uses for funds include expenses directly supporting the minor’s well-being and development, such as education costs, healthcare expenditures, and enrichment activities like music lessons or summer camps. Reasonable living expenses can also be covered. Conversely, using UTMA funds for expenses that are legally the parent’s responsibility, such as basic food, shelter, and clothing, is impermissible unless specific circumstances are present. Custodians should maintain meticulous records of all expenditures.

An important aspect of UTMA accounts is their irrevocable nature; once assets are contributed, they legally belong to the minor. The custodian’s control over the account terminates when the minor reaches the age of majority in their state, which is typically 18 or 21. This age threshold determines when control shifts from the custodian to the now-adult beneficiary.

The Withdrawal Process for Custodians

When a custodian needs to withdraw funds from a UTMA account before the minor reaches the age of majority, the process begins by contacting the financial institution where the account is held. Each institution, whether a bank or brokerage, may have different procedural requirements. Financial institutions commonly allow custodians to request withdrawals online, via phone, or in person.

To complete a withdrawal, the custodian will need to provide identification, such as a driver’s license, along with the UTMA account number and the specific amount. While financial institutions do not typically demand proof of how the money will be spent for “for the benefit of the minor” withdrawals, the custodian remains legally obligated to use the funds appropriately. It is prudent for custodians to keep detailed records of all transactions and their purposes.

Funds can be disbursed through various methods. Some institutions offer online transfers, while others may issue a check made payable to the custodian, clearly indicating their custodial role for the minor. In-person withdrawals at a branch are also common. Direct transfers to another account are only permitted if the receiving account is also titled as a UTMA account for the same minor.

Beneficiary Access Upon Reaching Majority

Once the minor beneficiary reaches the age of majority, legal control of the UTMA account automatically transfers from the custodian to the now-adult beneficiary. The former minor gains full legal ownership and discretion over the assets.

To initiate this transfer, the beneficiary should contact the financial institution holding the UTMA account. They will need to provide proof of identity and age, such as a birth certificate or a government-issued identification. The institution will then guide the beneficiary through the necessary forms to re-title the account in their own name or to facilitate the transfer of funds to a personal account.

Upon gaining control, the now-adult beneficiary has several options for the funds. They can keep the assets invested in a new personal account, withdraw the funds for personal use, or transfer the funds to another investment vehicle. The former custodian’s role concludes, and they should cooperate with the beneficiary to ensure a smooth transfer of assets.

Tax Implications of UTMA Accounts

Earnings generated within a UTMA account, such as interest, dividends, and capital gains, are subject to income taxation. The minor is responsible for reporting this income on their tax return, even though the custodian manages the account. The custodian assists in ensuring the tax return is filed.

The “Kiddie Tax” rules apply to the unearned income of children, including that from UTMA accounts. Under these rules, a portion of the minor’s unearned income may be taxed at the child’s lower tax rate. However, unearned income exceeding a certain threshold is taxed at the parent’s marginal tax rate or the rate applicable to trusts and estates. Dollar thresholds for these tax rates are adjusted annually by the IRS.

Withdrawals of the original principal contributed to the account are not considered taxable events, as these funds were already taxed before their contribution. However, any earnings that have accrued within the account are subject to tax as they are generated. These earnings are taxed under the Kiddie Tax rules. Given the complexities of tax laws and their potential variations based on individual circumstances, consulting with a qualified tax professional is advisable for personalized guidance.