How should I invest the money in an UTMA account?[ Edited ]
I established a UTMA account for my 5 year old son, which currently contains roughly $4,600. What investment options should I consider for this account (e.g. one or more index funds or ETFs)? I intend to let this account grow for at least 16+ years, and then eventually transfer account ownership to my son when he's an adult (probably after he's graduated from college). I've already established a 529 account for him, so this UTMA account probably won't be used for educational expenses. Thanks in advance for your advice.
One of the great features of Uniform Transfers/Gifts to Minors Accounts (UTMA/UGMAs) is that the custodian has much greater flexibility on how to invest the money inside the account. Of course, as you point out with your question, this flexibility can sometimes present a challenge because your investment choices are not as simple as just selecting from a list of packaged investments like those inside a 529 plan. So to your question then, what should you do?
Diversification Still Makes Sense
Even though you’ve got a ton of investment flexibility inside an UTMA, I’d still encourage you to create and maintain a diversified portfolio just as you’d find in the pre-packaged investments of a 529 plan. This way, you wouldn’t be concentrating all of your investment eggs in too few asset class baskets and hoping you pick the right ones.
Here are a few ways you could go about this.
- Build your own portfolio – If you’ve got the time, knowledge, and interest, you could build your own diversified portfolio just as you’ve suggested. Your one initial challenge with this though could be that your dollar amount probably isn’t large enough to broadly diversify across multiple asset classes. For example, if you use mutual funds the investment minimums per fund could prohibit you from investing in as many funds as you should. One potential way around this – as you’ve suggested – would be to use ETFs. However, just pay close attention to the trading costs you’ll incur relative to the dollar amount you’ll be investing in each. This approach will also create extra costs as you rebalance in the future. So even though ETFs might allow you to get more diversification with this dollar amount, managing a portfolio of them could get expensive. In either case, building your own portfolio might still be a possibility worth exploring.
- Invest in an allocation fund – Most mutual fund companies offer what are commonly referred to as Static Allocation or Asset Allocation funds. The investments inside these funds typically consist of other mutual funds that are selected by the manager(s) and are allocated in such a way as to create a certain risk profile such as aggressive, moderate, etc. Since these funds are designed to maintain a pre-determined risk profile, the fund manager will regularly balance the portfolio to try to keep it in line.
- Invest in a target date fund – Though these funds are actually designed for retirement investing, the concept they employ of gradually decreasing portfolio risk is very similar to that used in the age-based portfolios inside 529 plans. Before you invest in one though, you’ll want to make sure the portfolio risk level and glide path are in line with your investment objective and tolerance for risk.
So there you have a few ideas that you might want to explore. To be completely honest though, I really don’t have enough information about your situation to say whether or not any of these would be a good idea for you. Consequently, I’d encourage you to contact our team of Financial Advisors here at USAA to discuss your situation and determine appropriate possible solutions. They can be reached at 800-771-9960.
Finally, let me share one quick point about your thought of giving this money to your son once he graduates from college. The fact is, the UTMA laws of your son’s state of residence will dictate when the money legally becomes his. For some states, it’s as early as age 18 and for others it’s as late as 21.
Thanks so much for your question and best of luck to you and your son!