Uniform Gift to Minors Act Withdrawal: Rules and Guidelines Explained
Understand the rules for withdrawing funds under the Uniform Gift to Minors Act, including eligibility, permitted uses, tax considerations, and documentation.
Setting up a financial account for a minor can be a great way to save for their future, and the Uniform Gifts to Minors Act (UGMA) provides a simple legal framework to do so. However, withdrawing funds from a UGMA account comes with specific rules and restrictions. Understanding these rules is essential to avoid tax consequences or improper use of funds.
Who Can Withdraw Funds
The custodian, usually a parent or guardian, manages the UGMA account until the minor reaches the age of majority. Only the custodian can withdraw funds, and withdrawals must directly benefit the minor. The custodian cannot use the funds for personal expenses.
Financial institutions often require documentation before approving a withdrawal, such as a written request detailing the purpose and proof that the expense benefits the minor. Some banks or brokerage firms may also request receipts or invoices. Without proper documentation, withdrawals may be delayed or denied.
Once the minor reaches the age of majority—typically 18 or 21, depending on the state—the custodian loses control, and the minor gains full access. Financial institutions generally require proof of age, such as a government-issued ID, before transferring ownership.
Eligible Uses of Withdrawn Funds
Withdrawals must benefit the minor. Educational costs, including tuition, books, school supplies, tutoring, and private school fees, are common uses. While college expenses are a natural fit, withdrawals can also cover primary and secondary education.
Medical expenses, including doctor visits, dental care, vision treatment, prescription medications, and health insurance premiums for the minor, are allowed. If specialized care is needed—such as therapy or medical equipment—custodians should keep invoices or insurance statements as proof.
Funds can also cover extracurricular activities that contribute to the child’s development, such as music lessons, sports programs, and summer camps. However, luxury items or expenses primarily benefiting the custodian, such as a family vacation, do not qualify. If an expense has both personal and child-related components, only the portion directly benefiting the minor should be covered by UGMA funds.
Age of Majority Guidance
When the minor reaches the age of majority, they gain full control of the UGMA account. Without financial literacy, there is a risk of mismanaging the funds.
If the account holds investments such as stocks, mutual funds, or bonds, the new owner must decide whether to hold, sell, or reinvest. Market fluctuations, capital gains taxes, and risk tolerance should be considered before making decisions. Selling assets too quickly can lead to unnecessary tax liabilities or missed investment opportunities.
If the account balance is substantial, the new owner may need to consider estate planning, such as naming beneficiaries, setting up a trust, or transferring funds into another investment vehicle. Without proper planning, unintended financial consequences may arise, especially if additional wealth is acquired later.
Documenting a Withdrawal
Proper documentation is necessary when withdrawing funds. Custodians should maintain detailed records, including the amount withdrawn, the recipient, and the expense’s purpose. Inadequate documentation can lead to audit risks or questions about whether the funds were used appropriately.
Bank statements alone are insufficient proof of a legitimate withdrawal. Supporting documents such as invoices, contracts, or detailed receipts should be kept. For example, an itemized tuition bill with the minor’s name and course details should be retained for educational expenses. For medical expenses, billing statements from healthcare providers serve as necessary proof. Keeping organized digital or physical records can prevent issues if the account is reviewed.
Tax Issues for Withdrawals
UGMA accounts are considered the minor’s property, meaning any income generated—whether from interest, dividends, or capital gains—is taxed under the minor’s Social Security number. The taxation of withdrawals depends on the type of assets held and how they are liquidated.
The “kiddie tax” applies to investment income from UGMA accounts. For 2024, the first $1,300 of unearned income is tax-free, the next $1,300 is taxed at the minor’s rate, and any amount exceeding $2,600 is taxed at the parent’s marginal tax rate. If a withdrawal involves selling appreciated assets, capital gains may be taxed at a higher rate. Spreading withdrawals over multiple years may help reduce tax burdens if the minor has little to no other income.
Unlike 529 plans or Coverdell ESAs, UGMA withdrawals do not receive tax advantages when used for education. Any realized gains are still subject to taxation. Additionally, UGMA assets count as the student’s property for financial aid purposes, which can significantly impact eligibility under the Free Application for Federal Student Aid (FAFSA), as student-owned assets are assessed at a higher rate than parental assets.