Acorns Early: Review and How Acorns Early Works
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By Nick Mann

October 6, 2020

Acorns Early is a simple way to invest in a child’s future. It’s a UTMA/UGMA account that lets parents, guardians, or family members create a custodial account for a child right in the app.

Unlike a 529 college savings plan where the funds can only be used for education, the money saved with Acorns Early can go toward anything that benefits the child.  

What is a UTMA/UGMA Account?

UGMA and UTMA accounts are custodial accounts, in the name of the minor, but are completely controlled by a parent or other relative until the child reaches the age of majority in your state.

UGMA and UTMA accounts allow parents to save money and invest and maintain full control until their child is an adult. Both accounts allow you to transfer financial assets to a minor without establishing a trust. 

UTMA/UGMA account have a less favorable financial aid impact than 529 plans. When it comes time to fill out the FAFSA (Free Application for Federal Student Aid), UGMA and UTMA accounts are reported as a child’s asset, reducing aid eligibility by 20% of the asset value. Since 529 plans are usually reported as a parental asset, they reduce aid by up to 5.64% of the asset value. 

UTMA and UGMA accounts do not have the tax benefits that a 529 plan offers. Contributions are made with after-tax dollars. You can contribute up to $15,000 annually without incurring a gift tax ($30,000 per married couple). The first $1,100 of a child’s unearned income is tax-free. The next $1,100 is taxed at the child’s rate. Anything over that is taxed as the parent’s income. 

But compared to a 529 plan, UGMA and UTMA accounts provide more flexibility in how the funds can be used. To avoid a penalty with 529 plans, money needs to be used for specific educational expenses, including tuition, books, supplies and a computer. The funds in an UGMA/UTMA account can be used for anything – a car, travel, or other college-related expenses not consider a qualified expense, such as application fees or health insurance.

While a child is a minor, funds can be used to pay for expenses that benefit the child, such as clothes for school and summer programs.

How Does Acorns Early Work?

First, you create an account on Acorns Early, which can be done in under 5 minutes. You can set up daily, weekly, or monthly Recurring Investments to make payments convenient and hassle-free. 

The money is set aside in the account and becomes available to the child at their “age of transfer,” which is when they’re legally considered an adult based on their location, usually 18 or 21.

Here are some features that Acorns Early offers:

  • The option to add multiple children at no additional cost
  • Automated Recurring Investments
  • Exclusive family-friendly bonus investments
  • Access to family financial advice via articles and videos from experts
  • Potential tax savings
  • Flexibility managing the money

Besides that, you also have access to Acorns’ full financial wellness system that comes along with built-in investment, retirement, and checking accounts. 

Pros of Acorns Early

Perhaps the biggest benefit is that there are no restrictions when it comes to qualified expenses. Money saved in a 529 plan can only be spent on qualified educational expenses, such as tuition, fees, books, school supplies, and so on. However, the money saved in Acorns Early can be spent on college, to purchase a vehicle, or anything else the child needs once they become an adult. It’s very flexible. 

For parents that have decided a 529 college savings plan is the primary way they want to save for college, a UGMA/UTMA account can be a good compliment since these accounts can pay for non-qualified expenses. These can include a car, travel expenses, college application fees, and other costs considered a non-qualified expense in a 529 account.

There’s also the potential to save a significant amount of money. fFor example, if you invest just $5 a day for a child from birth, considering a 7% average market return, that Early account could have mre than $60,000 by the time the child is 18-years-old.

And the access to expert financial advice is a nice touch, especially if you don’t know much about investing but you want to quickly grow your knowledge.  

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Cons of Acorns Early

As with any UGMA account, when it comes time to fill out the FAFSA (Free Application for Federal Student Aid), the money in this account is reported as a child’s asset. This reduces aid eligibility by 20% of the asset value. This means less opportunity for free money known as grants, the chance to participate in work-study programs, or for federal student loans, which have much more favorable benefits than private student loans. On the other hand, 529 plans, whether owned by the parent or child, are treated as a parent asset and reduce aid eligibility only up to 5.64% of the asset value.

UGMA accounts don’t offer the same tax benefits of a 529 plan.

While Acorns’ fees are quite small for larger accounts, they can be hefty if you only have a small balance. Say for example, your account balance is only $100. With a $5 a month fee, this would come out to $60 a year and eat up 60% of your account balance. Once you get to $5,000, Acorns’ fees would only account for 1.2% of your account balance. But during the earlier stages, the fees can be substantial in comparison to how much you’ve saved. 

You’ll also get hit with account fees if you ever decide to move your money from Acorns Early to another account. As of 2020, Acorns charges $50 per exchange-traded fund (ETF). 

The other main issue is that the size of Acorns’ robo-advisor portfolio is rather small compared to other options and consists of just five to seven asset classes. Although this is certainly enough to be considered a diversified portfolio, there are similar types of UTMA/UGMA accounts that are less restrictive.

Who Acorns Early is Best For

It’s ideal for people who: 

  • Want a “spare change” account to invest in the future of a child and don’t want the limitations of a 529 plan and don’t mind losing out on the tax and financial aid benefits of a 529 plan
  • Want to make Automated Recurring Investments
  • Want to learn more about investing along the way

Bottom Line Recap

Acorns Early is a UTMA/UGMA account that allows parents, guardians, or family members to invest money into a child’s account that becomes available once they reach adulthood. It’s quick and easy to set up and is a great way to dip your toes in the water of investing. Sign up here.

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At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.

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