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I currently have a second savings account where I'm saving money for my child's future - most likely it will be used for their college and/or wedding.

I've heard horror stories of parents stealing their children's savings to feed an addiction. I don't plan to do that, but for argument let's say I can't trust that my wife and I will stay "safe" over the next two decades.

What sort of savings or investment account can I open for my child where:

  • I can easily add funds
  • (ideally) I can view the balance and watch its performance as an investment
  • My wife and I cannot withdraw from it, or withdrawing from it is very difficult
  • My child can withdraw from it easily once they are an adult

I'd ideally like a low-risk investment with a better rate of return that just your typical bank savings account. The main focus, however, is that it should be inaccessible to my wife and me while being accessible to my child.

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    +1 for realizing all aspects of an addiction (if that is what it is) – Insane Feb 6 '16 at 2:14
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Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts in the United States are accounts that belong to your child, but you can deposit money into. When the child attains his/her majority, the money becomes theirs to spend however they wish. Prior to attaining their majority, a custodian must sign off on withdrawals.

Now, they are not foolproof; legally, you can withdraw money if it is spent on the child's behalf, so that can be gamed. What you can do to protect against that is to make another person the custodian (or, perhaps make them joint custodians with yourself, requiring both signatures for withdrawals).

UTMA/UGMA accounts do not have to be bank savings accounts; for example, both of my children have accounts at Vanguard which are effectively their college savings accounts. They're invested in various ETFs and similar kinds of investments; you're welcome to choose from a wide variety of options depending on risk tolerance. Typically these accounts have relatively small fees, particularly if you have a reasonable minimum balance (I think USD$10k is a common minimum for avoiding larger fees).


If you are looking for something even more secure than a UGMA or UTMA account, you can set up a trust. These have several major differences over the UGMA/UTMA accounts:

  • Trust documents can explicitly state what purposes money may be withdrawn for.
  • Trusts can turn over control to the beneficiary at a later (or earlier) date than a UGMA/UTMA account, which has a legally defined date the child gains control. For example, a parent cannot require a UGMA account be used to fund college - the child could do whatever he/she wants with the money at 18. A trust could require the funds be spent on college, and only turn over excess proceeds at 25, for example.
  • Trusts will cost significantly more money to set up (as a lawyer will need to be involved, most likely), but the lawyer may also provide an additional level of confidence the money cannot be disbursed improperly.

Some of course consider the second point an advantage, some a disadvantage - we (and Grandma) prefer to let our children make their own choices re: college, while others may not prefer that.


Also worth noting as a difference - and concern to think about - in these two. A UGMA or UTMA account that generates income may have taxable events - interest or dividend income. If that's over a relatively low threshhold, about $1050 this year, those earnings will be taxed (on the child's own tax return). If it's over $2100 (this year), those earnings will be taxed at the parents' tax rate ("kiddie tax").

Trusts are slightly different; trusts themselves are taxed, and have their own tax returns. If you do set one of those up, the lawyer who helps you do so should inform you of the tax implications and either hook you up with an accountant or point you to resources to handle the taxes yourself.

  • Can I set up any account as an UTMA/UGMA? Do I just talk to a clerk at my local bank branch to make the second savings account into one? – Martin Carney Feb 5 '16 at 23:08
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    I'm not sure about the mechanics of conversion; it may be that simple, or you may have to technically open a new account and transfer the money into it, closing out the original. But any bank should have an UGMA and/or UTMA account, certainly; and they're often low or zero fee. What I'm not sure about, though, is if you do this, how easy it would be to then transfer the funds to an investment-capable account (say at Vanguard); in theory it should be possible, but I'm not sure if there are roadblocks to prevent you from transferring it improperly that might get in the way of a legit transfer. – Joe Feb 5 '16 at 23:09
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    Do not trust lawyers on tax issues, they're usually quite bad at assessing tax risks. Lawyers will happily set up a trust for you, but tax-wise it is not as good as UGMA/UTMA (tax rates are higher, deductions are lower). If choosing to go the trust path - get a lawyer and a tax adviser. – littleadv Feb 6 '16 at 8:27
  • If you know the money is going to college in particular, you could also consider 529 funds. Your trust or UGMA may have FAFSA implications which the 529 is explicitly immune to. – Kevin Feb 6 '16 at 17:38

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