When it comes to helping kids save money, there are just so many different options. Of course, you could go with the traditional savings account. However, those generally don’t keep up with the rate of inflation, so they will actually be losing money. There are also money market accounts and CD’s, which can be some other better options. And if your child has any earned wages, then you can open up a custodial Roth IRA for them. Roth IRA’s can earn the highest market returns of an average 8%. But, if they don’t have any earned income, you can’t use those types of accounts. This is where a UTMA account comes into play instead.
What is a utma account?
A UTMA account is a Uniform Transfers to Minors Act account. This is a custodial account that is for taxable investing. Which is slightly different than a Roth IRA account, in that anything your child withdraws from the account in the future will be taxed.
We opened all of UTMA accounts at Fidelity, since they are one of the few that have custodial accounts. Initially, we planned to open all of the Roth IRA’s and UTMA’s with Betterment, since that is where our Roth IRA’s are. But, we found out that they don’t support custodial accounts yet, so that wasn’t an option.
Since I had an old 401k with Fidelity, it just made the most sense to stick with them. Plus, their customer service is amazingly helpful. So, if you decide to open either a Roth IRA or a UTMA for your child, you can call them and they will walk you through the whole process.
HOw can it be funded?
UTMA accounts can be funded through any account you care to connect to it. They don’t have the restrictions that Roth IRA’s do when it comes to the funding or where it comes from. What this means is that you can attach any account with EFT (Electronic Funds Transfer) capability to each UTMA. Most banks won’t open anything other than a savings account for younger children, which don’t have EFT functionality, though. So, if you have younger children, you will probably have to fund their UTMA accounts with your own checking account.
Initially, we found out that some of the kids had savings bonds purchased for them when they were first born. Instead of just letting them sit there earning very little interest, we decided to cash them out and put the money into their UTMA accounts instead.
However, you can put money into these accounts at any time for any reason. So it wouldn’t just have to be from old savings bonds.
We also found that some grandparents like to give money for birthdays and holidays. Or they send us a check to get their gifts and we don’t spend all of it. So we have started putting that “extra” money into their UTMA accounts also. This way it will really help the kids in the future because they don’t even realize the money is there. And, they aren’t just getting more toys for us to break our toes on. Bonus for us!
With that being said, here are some ways you can think about funding your children’s UTMA accounts:
- Old savings bonds
- Extra birthday money
- Allowance money
- Side hustle money (kid’s lemonade stand, yard work, etc.)
- Money for good grades
- Gifts (just because)
teaching about investing
One of my favorite things about these accounts, besides how easy they are to fund, is that it helps us teach them about investing. Even the youngest one, at the ripe old age of 8, has found this to be a lot of fun.
Once you put money into the UTMA account, it just sits there in a money market earning basically nothing until you choose your investments. The kids can invest in mutual funds, individual stocks or ETF’s.
Teaching them the difference between the three is just the beginning of the lesson. Once they grasp the different types of accounts, then I let them find companies they are interested in. I had to explain what publicly traded meant a few times, but once they got that concept, they were on a roll.
After they wrote down a list of everything they were interested in, then came the extra fun part for me. I like for the child to see how certain assets are performing before they decide whether to pull the trigger or not. There are many different places to look up ticker symbols to find out how they are performing.
Marketwatch is a good one to start with because it is very in depth. But, if you can’t remember where to go, you can always just type in the ticker symbol in the Google search box and the first thing it usually pulls up is how the stock is performing.
I like to make sure the kids see how an asset has been performing for the past 6 months, 1 year and 5 years. A lot of times this has changed their mind about purchasing a certain fund because they don’t like how it has been performing.
I answer all of their questions to the best of my ability, but I don’t want to choose for them. This is a huge learning experience for them while they are young, so I don’t want to push them one way or another. After all, if they lose money on their choices right now, it won’t really hurt them financially in the future. So this a great time to get their feet wet.
utma account summary
Overall, opening up a UTMA account for your child is a great way to help save for their future. While these accounts are a bit different than Roth IRA accounts, they operate fairly similarly with rate of returns. These accounts have the potential to net your children some great interest on money they aren’t spending while they are young. Which means they have the opportunity to create a decent sized nest egg before they leave your nest.
Plus, you get to teach them about investing and the stock market. Which is a great lesson to learn while they are young. I know I wish my parents would have taught me more about it when I was younger, because I would have been a much savvier investor in my early twenties. But, you can’t change the past, only the future. And that is exactly what we are trying to do with our children by opening up UTMA accounts for them now.
Have you heard of a UTMA account or opened one up? If so, what has been your experience with them so far?