UGMA accounts are taxable accounts, but they are typically taxed at the minor’s tax rate, which is generally lower than the parent’s tax rate.

Typically, the first $1,150 of unearned income each year in the account is treated as tax-free. The next $1,150 in unearned income is taxed at the child’s rate. Anything above $2,300 in annual earnings from the account would be taxed at the parent’s tax rate. So in most cases, there are no taxes paid each year, or taxes will be much less than in a standard investment account.

Here is an example:

Little Johnny receives $1,500 in dividends and capital gains from investments in his UGMA account. The first $1,150 is tax-free. The remaining $350 would be subject to tax at Johnny’s tax rate. Since Johnny is in the lowest tax bracket (10%), he would only owe $35 in taxes on the $350 of income.

Now, let's consider the same $1,500 of investment income held in a regular taxable account without the benefit of the child's lower tax rate. If Johnny’s parents are in a 30% tax bracket, they would owe $450 in taxes on the entire $1,500 of income at their higher tax rate.

In this example, the UGMA account allows for potential tax savings compared to a regular taxable account, as the child's lower tax rate results in a lower tax liability on the investment income.

*Fabric by Gerber Life and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.