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- Fabric by Gerber Life launched a new investment account for parents to invest on behalf of their kids.
- UGMA custodial accounts are managed by parents/guardians, but the funds legally belong to the child.
- UGMA accounts are great tools for investing in your child's financial future and accumulating compound interest.
When you think of Gerber, your brain might jump to baby food. But Gerber's parent company also has a financial service called Gerber Life. Gerber Life's partner brand, Fabric by Gerber Life, offers affordable term life insurance, free wills — and now a new investment account for your child.
Fabric by Gerber Life has launched UGMA custodial accounts on their digital platform so you can invest for your child's future. A UGMA (Uniform Gifts to Minors Act) account is a type of investment account. It's similar to a 529 plan or education savings account, which allow parents to invest on behalf of a minor — but it has some crucial differences.
UGMA and other custodial accounts are typically offered through online brokerages or firms. But now Fabric by Gerber Life is throwing its hat in the ring.
Each account comes with a unique gifting link for you to send to friends and family members who want to contribute. Portfolios are SIPC-insured for up to $500,000 and professionally managed by Fort Washington Investment Advisors.
How to open a UGMA account with Fabric by Gerber Life
Opening an account with Fabric by Gerber Life is simple and only takes about five minutes. Since it's 100% digital, you can register directly on Fabric's website. You'll need to fill out basic personal information like your name and age, child's name and age, and state of residence.
There's a $20 monthly contribution requirement — this can be deposited all at once or as $1 per day for 20 days. There is also a $3 monthly fee ($5 per month flat fee for multiple UGMA accounts). From there, you can choose the portfolio that best fits your risk tolerance and time horizon, as well as opt-in for automatic recurring contributions.
With Gerber Life's fully digital UGMA account, you'll get access to automatic monthly contributions, mobile access, and adjustable investment portfolios based on your family's individual financial situation. Fabric by Gerber Life allows you to adjust your portfolio selection at any point.
5 reasons to open a UGMA account
UGMA accounts are great options for parents who want to start investing on behalf of their child. Parents can make a withdrawal at any point, but it must be for the direct benefit of the child — not personal expenses. Once the child reaches the age of maturity (which varies by state), they are granted legal control of the account.
Here are five reasons to open a UGMA custodial account and get a jump-start on your child's financial future.
1. Easy set-up
Compared to legal arrangements like trusts — which permit a trustee, such as a parent or guardian, to hold assets on behalf of a beneficiary — custodial accounts are easy to set up. You only need to fill out basic personal and financial information, such as the beneficiary's name, birthday, and Social Security number.
Trusts, on the other hand, require more extensive steps to set up, like consulting and hiring an estate planning attorney and getting your documents notarized by grantor(s) and trustee(s).
2. Power of compound interest
The power of compound interest is one of the most sought-after methods of long-term wealth building. UGMA custodial accounts, similar to other investment accounts, accumulate interest on interest to help funds grow at a faster rate than with simple interest.
When paired with investing strategies, accumulated compound interest on UGMA accounts can reap long-term gains for your child's financial future. Depending on the terms of your account, interest can be calculated daily, monthly, or annually.
3. Tax advantages
UGMAs aren't tax-deferred and are generally taxed like any other investment account. However, contributions to custodial accounts are considered "irrevocable gifts," which means assets in the account technically belong to the child and may be eligible for tax advantages under the "kiddie tax" rule.
Under the kiddie tax rule in 2023, a child's first $1,250 of unearned income each year is tax-free. The next $1,250 is eligible for a lower child tax rate. After that, additional contributions to a UGMA are taxed at the parent's regular marginal income tax rate.
Capital gains are included in your child's total unearned income for the year.
4. No contribution limits
UGMAs have no contribution limits, which means you can gift as much as you deem feasible in a given year. The more you gift toward your child's future, the larger the original principal balance and the more compound interest they can accumulate.
However, the IRS does enforce a gift tax threshold for tax purposes. In 2023, married couples can gift up to $34,000 per year (up to $17,000 for individuals) without tax consequences. But other family members and friends can still gift contributions (also up to the IRS limit) even after you hit the threshold.
There's no limit on the number of contributors that can participate toward a UGMA account.
Although you may suffer tax consequences if you gift over the gift tax threshold — such as having to file a gift tax return — you can technically still contribute as much as you'd like. Contributions exceeding the annual threshold count toward the $12.92 million federal lifetime gift-tax exclusion limit for parents.
5. Flexible spending
A UGMA account is a type of custodial account that permits parents/guardians to invest on behalf of a child/dependent. Rather than funding a 529 plan, which must be used for educational purposes, the money in a UGMA is far more flexible.
Money from a UGMA account can be used for essentially any purchase as long as it's for the child's direct benefit. For example, you can use UGMA accounts to save for:
- College tuition or other higher education expenses
- Rent payments
- Extracurricular activities
- Transportation and car payments
- Student loans
- Trip expenses
The longer the money is in a UGMA account, the more compound interest it accumulates. Parents can make withdrawals before the child reaches maturity as long as it's for the direct benefit of the child, but they are not eligible to make withdrawals once the child reaches the age of maturity set by the state.
It's also important to note that contributing to a UGMA account may affect your child's ability to receive financial aid. If you're unsure if this custodial account is right for you, consider consulting a CFP for professional insight and guidance.