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How To Give A Stock To Kids With A UGMA Depot | Budgets Are Sexy

How to give a stock to kids with a UGMA depot | Budgets are sexy

When my wife was a baby, one of her aunts opened a gift account and invested a few thousand dollars. This aunt was quite financially savvy and had no children of her own. She put the money in a UGMA account (named after the Unifed Gifts to Minors Act) and invested it in a broad, low-cost mutual fund that would multiply over time as my wife grew up.

Today this investment account is around $ 35,000. 😳

It’s a little embarrassing for us to talk about. My wife and I are very proud people … the do-it-yourself type. We don’t take flyers and big gifts make us uncomfortable.

But as time has passed, we have found ways of accepting the gracious gifts and blessings that await us. One of those ways is to to pay in advance. The blessing that rains our whole life -> we pay it up and try to let it rain on others!

About four years ago, when our first nephew was born, my wife and I opened a UGMA account for him that had $ 2,500 invested in a stock index fund. The same goes for the second, third, and fourth nephews when they were born … a total of $ 10,000 donated so far! When they are of legal age, they can access the college savings account, a down payment on real estate, or keep the money as an investment that counts towards their own FI number!

We have set up all accounts with Fidelity. This was a really simple online process that I’ll be sharing at the end of this post.

A screenshot of the 4 accounts shows a combined balance greater than $ 12,000.

Benefits of Investing with the Uniform Gifts to Minors Act (UGMA)

Originally, my plan was to just buy a few stocks on my regular personal brokerage account and find out the transfer later when my nephews were older. But after calling my Fidelity rep and discussing the options, my wife and I got to know about UGMA custody accounts and really liked what they had to offer.

The Law on Uniform Gifts for Minors was created in the 50s. It allows people to transfer assets to children, but retains control of those assets until the child reaches legal age. It’s like building a trust, but a lot easier.

We also checked the 529 plan option and college savings accounts. But going to college is a decision we wanted to leave up to the kids and their parents. Personally, I never went to collegebut my wife did. We didn’t want to create a college savings account that our nephews felt like being in put under pressure to go to school just because they have the money.

Even for the amount we’re giving away, we’re not overly concerned about the tax benefits of college savings accounts. The kiddie tax should be low – and we might even be able to make capital gains when the child is young with no income.

Roth IRAs versus UGMA

Children can open Roth IRAs and there is no age limit. But the child has to earn an income. The income must be at least as high as the amount contributed to the Roth.

The process and account type for Roth IRAs is very similar to that for UGMAs – you open the account and assign an adult to be the custodian – and it is then transferred to the child when they are of legal age. Some brokerage firms don’t offer them Custody IRAs, but Fidelity and Charles Schwab do.

Since none of my little nephews earn income, we couldn’t set up a Roth for them.

Why I like UGMA accounts and why we choose Fidelity

  • No attorneys, no messy trust papers, it’s $ 0 to set up and $ 0 to maintain!
  • Online setup typically takes 10 minutes. All you need is the child’s name, date of birth, SSN and address.
  • You can designate any adult as a “custodian” (like a “trustee” of a trust) and have full control of the investments until the child comes of age. (I’ll be the administrator of my nephew’s accounts and will pass it on to their parents at a later date.)
  • The asset is counted against the minor’s estate so tax is calculated at the child’s tax rate.
  • With Fidelity, there are no trading fees or a minimum amount you have to give. You could only transfer $ 1 if you’d like. (However, some index / mutual funds have trading minimums that you must adhere to as usual.)
  • When the child comes of age, the account can be transferred to their name like a regular brokerage account. They can do what they want with the money.

What you should know before setting up a gift account

  • The uniform Transfers to Minors Act (UTMA) is a little different from the uniform Gifts under the Minors Act, mainly tax liability and term. Possibly reach out to your brokerage firm and tax advisor if you have large amounts of money or stock in your mind!
  • Depending on which state you live in, the child will become the owner at 18, 19, or 21 years of age. This website shows the age of the majority for each state for UGMA and UTMA.
  • This is an irrevocable transmission! You cannot change your mind and take your money back later. The child owns it, not you or the parents.
  • A major UTMA can have an impact on the child’s financial eligibility later in life!
  • For everyone that Uncle Scrooges has out there … if you’re giving more than $ 15,000, you’ll have to pay gift tax to the IRS. Here you can find the limits for the gift tax and frequently asked questions.

Compound interest… The 8th wonder of the world, especially for children 😍

Every time I log into my Fidelity dashboard, I can see the progress of my nephew’s accounts. There’s nothing more sexual than watching money grow over time. 🙂 Although these are gifts for her, I get so much pleasure from enjoying the ride and imagining the future balance!

We’re 14 years away before the oldest can access the money in his UGMA (which has already grown to over $ 4,000). But this is how it could look in the future with compound interest …

Assuming a growth rate of 8% and a starting balance of $ 4,000 today, if those are not touched …

  • At the age of 18, the account could be worth $ 11,748!
  • At the age of 30 the account could be: $ 29,585! Woohoo!
  • At 40, he could be $ 137,896. Boom!
  • If he keeps the account until the age of 70, it’ll be $ 642,728! Booyah!

I hope my nephews are wise and continue to keep the money invested, just as my wife didn’t touch her gift account and is still making it grow.

How to open and set up a UGMA account … It’s that simple …

I created a depot at Fidelity for my newest baby nephew last month. Here is the process! Takes less than 10 minutes …

  1. Go to the Fidelity homepage. Click on “Open an Account” above and then on “All Accounts”:
  2. Scroll down and find “Custodial Account” and click “Open Online”:

  3. Complete the information on the minor beneficiary. You need the valid name, date of birth, SSN and address. This is her address, not yours! (If babies are born in the US it can take a few months to be assigned an SSN – be patient 😀)

  4. Enter the information of the custodian or trustee. Can be a parent, grandparent, trusted finance professional, or yourself! If you are already a Fidelity customer and logged into your account, this part will be automatically filled in with your details. If you want to appoint someone else, you can.

  5. Open, read and approve all account documents. It is important to note that you can always save the application and pick up where you left off. My trick to reading long contracts is to print out all the pages and then read for about 20 minutes each morning.

  6. Choose how you want to add money to the account! I went with the one-time transfer from a bank.

  7. Transfer from your bank to the gift account. If you don’t see your bank account information here, you’ll need to link a new bank account. This is a pretty seamless process, just like connecting to a regular brokerage account. You will need your bank transfer and account number to hand.

  8. Bank transfers can take 1-3 days. But as soon as the money lands in the account, don’t forget to invest it in an index or a stock !!! I go with Fidelity’s Total Stock Market Index. (You can also set up recurring transfers in case you want to divert a small portion of your income instead of a flat rate.)

  9. Pour yourself an ice cold drink. And relax knowing that you are helping your little loved one financially and providing information about investing to the ankle-biters.

I’m going to visit my newest little nephew on the east coast earlier this year!

Joel pushes nephew in a stroller in a park

Hope this post helps everyone out there looking for underage stocks! Let me know if you have any questions in the comments 👇👇👇

Have a good one!

* Top picture of Micheile Henderson!


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