The major differences between a UGMA or UTMA account and a 529 college savings plan include the tax impact, the financial aid impact, account ownership, and permitted uses. 529 plans have a more favorable tax and financial aid impact and provide the parent with more control. UGMA and UTMA accounts provide more flexibility in how the funds can be used.
Overall, most people will find a 529 plan to be a better option. Here’s how they both compare.
Overview of UTMA vs. 529 Plans
The largest difference is how these accounts are owned, and who makes the investment decisions. There are also some very important tax distinctions between the accounts, namely that 529 plans defer tax gains. This table summarizes a few key differences between UTMA accounts and 529 plans.
Characteristic
UGMA or UTMA Account
529 Plan Account
Ownership and Control
An UGMA or UTMA account is a child asset, controlled by a custodian until the child reaches the age of majority
A 529 plan is controlled by the account owner, who is usually the parent
Tax Impact
Taxes are paid on the earnings on an annual basis, with some Kiddie Tax benefits
Earnings accumulate on a tax-deferred basis and are entirely tax-free if distributions are used to pay for qualified educational expenses. The earnings portion of a nonqualified distribution is taxable, plus a 10% tax penalty. Many states offer a state income tax break based on contributions to the state’s 529 plan.
Financial Aid Impact
Reported as a child asset on the FAFSA, reducing aid eligibility by 20% of the asset value
Usually reported as a parent asset on the FAFSA, reducing aid eligibility by up to 5.64% of the asset value
Change Beneficiary
No
Yes, to a member of the family of the old beneficiary
Investment Options
Unrestricted
To a selection of a few dozen stock and bond mutual funds, FDIC-insured investments, money market accounts and cash, including age-based or target date funds
Permitted Uses
Any expenses, not just educational expenses
Qualified expenses include college tuition and fees, books, supplies, equipment, computer (including peripherals, software and internet access), room and board (if enrolled at least half-time), special needs expenses, up to $10,000 per year in K-12 tuition, up to$10,000 per borrower in student loan payments (lifetime limit)
See also:Should You Convert a UGMA or UTMA to a 529 Plan or Not?
A 529 plan is the best option if the child will go to college, while a UGMA or UTMA account provides more flexibility if the child will not be going to college.
UGMA/UTMA Account Overview
The UGMA was originally created as an alternative to trust funds for families that had limited assets. This was a way to leave a financial gift to a child in a custodial account. When new legislation was introduced in the 1980s, the plan was renamed to be the UTMA account. This also expanded the definition of what property could be left to children through these accounts.
These accounts are typically used to leave large sums of money or property to children that they can fully access until they become an adult. These accounts are used for much more than just money to pay for college and provide flexibility in what the child can use funds for when they reach adulthood.
Overview of a 529 Plan
A 529 plan was created for the specific purpose of providing money for a child to go to college. It’s exclusively a college savings tool and all of its benefits take place to pay for those types of expenses. These plans provide tax-deferred growth and withdrawals for approved college expenses for the beneficiary.
The plans can also be flexible as you can change the name of the beneficiary to a different child to pay for their college instead. This is helpful if one child doesn’t go to college or if you have leftover funds after the first finishes. You can also get the money out of the account and pay normal capital gains on the account at any time.
How to Choose Between UTMA and 529 Plans
The choice between a 529 plan and another type of investment vehicle may change when college enrollment is just a few years away. Here are the things you should consider before making your decision:
Risk tolerance:The percentage invested in stocks should decrease as college approaches, to reduce the risk of investment loss. When the child enters high school, no more than a third should be invested in stocks. When the child is a high school senior, only about 10% to 20% should be invested in stocks. This means that the return on investment will be much lower for a high school student, in the same ballpark as long-term certificates of deposit. So, return on investment may no longer be a distinguishing characteristic between 529 plans and UGMA or UTMA accounts.
Fees:You may find that a UTMA plan carries less fees than a 529 plan, but that doesn’t necessarily make it more affordable.
Tax breaks: Around the time the child enters high school, state tax breaks available on in-state 529 plans might matter more than having lower fees on an out-of-state 529 plan. The state income tax deductions and tax credits can function like adiscount on tuition. UGMA and UTMA accounts do not offer similar tax breaks.
Beneficiary changes: You can change the beneficiary of a 529 plan at any time but you can’t do that with a UTMA or UGMA account.
How your money impacts financial aid: A 529 plan is likely going to impact your overall financial aid eligibility less than a UTMA account will.
Which Plan Is Right for You?
A UTMA or UGMA account might be a fine fit for you if you’re not confident about how the funds are going to be used. If you’re confident that the account is going to be used for college expenses, however, then a 529 plan is going to be the best bet most of the time. You can’t match the tax and financial aid benefits of a 529 plan for college savings.
How to Open a 529 Plan
Opening a 529 plan is pretty straightforward, especially if you enlist the help of a financial advisor. You can simply choose the right plan for you, regardless of what state you live in or what state your child will go to college. You’ll want to find the 529 account type that is right for your child’s situation and that you feel will provide the best opportunity for growth.
Then after you choose the right account type and plan you want to invest in, you can fill out an application and fund the account. Once approved and funded you can choose what investments your account invest in to maximize the potential return.
The Bottom Line
Overall, a 529 plan and UTMA account aren’t typically used for the same thing. A UTMA account is used to transfer large values of money or property to a minor child while a 529 plan is used exclusively for college savings. A 529 plan provides the best way for a parent or grandparent to grow their savings in order to pay for the college of a loved one later.
Frequently Asked Questions (FAQs)
Is 529 or UTMA better?
It depends on what you want to transfer money to a child for. If you want to pay for college then a 529 plan offers more tax and financial aid benefits than a UTMA does.
Should I have both a 529 and UTMA account?
That depends on what you want to accomplish. You can have both accounts if you find it necessary and if you want to transfer money to a child for more than just college then you may want to consider the benefits of opening both accounts.
Who pays the taxes on a UTMA account?
The money held in a UTMA is owned by the child so it will be filed under the child’s taxes and charged at the child’s rate. The custodian of the account will be in charge of making sure those taxes are taken care of from the account.
If you have a medium to long-term horizon, either a UGMA/UTMA account or a 529 account is usually better than just putting your money in a savings account at a low-interest rate. And don't forget that it is possible to have both a 529 plan AND a UGMA/UTMA account for the same child.
529 Plans. The major differences between a UGMA or UTMA account and a 529 college savings plan include the tax impact, the financial aid impact, account ownership, and permitted uses. 529 plans have a more favorable tax and financial aid impact and provide the parent with more control.
And when it comes to being eligible for more financial aid, a 529 plan is the way to go. That's because a 529 owned by a parent is treated as an asset of the parent for financial aid purposes, while a UTMA/UGMA account is considered an asset of the child.
A big drawback is that all assets transferred into an UGMA account law are irrevocable transfers. This means that your child owns the assets, and the child has the authority (not the parent) on how to use the funds once the child reaches the age of majority.
In general, it's likely better to give money to people using custodial accounts because it's a gift that comes with no restrictions or strings attached. The heavy restrictions of a 529 are only worth dealing with if the tax benefits are very high and you're certain that the recipient will use the money for education.
Most 529s plans allow you to change the beneficiary once a year. So if your child won't be using the money, you can transfer the assets penalty-free to eligible family members, such as the account owner (typically a parent or grandparent) or a close family member.
Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child's—usually lower—tax rate, rather than the parent's rate. For some families, this savings can be significant. Up to $1,050 in earnings tax-free. The next $1,050 is taxable at the child's tax rate.
529 plan investments grow on a tax-deferred basis and distributions are tax-free when used to pay for qualified education expenses, including college tuition and fees, books and supplies, some room and board costs, up to $10,000 in K-12 tuition per year and up to $10,000 in student loan repayment per beneficiary and ...
The UTMA does effect financial aid. Because the UTMA is in the child's name, it will lower financial aid significantly. It is more efficient to tax the parent's assets rather than the student's.
An UGMA or UTMA account can be used to save for college, but there are several reasons why it might be better to save for college in a 529 college savings plan. However, if it is more likely than not that the child won't go to college, then an UGMA or UTMA account provides more flexibility than a 529 plan.
Note: UGMA and UTMA accounts owned by the student are considered assets of the student, and must be reported as an asset of the student on the FAFSA, regardless of the student's dependency status.
Can an UGMA/UTMA account reduce my child's financial aid for college? Answer: It can, but in the same way that any other asset held by your child can. An UGMA/UTMA account is a custodial account established at a financial institution for a minor child and managed by a parent or other designated custodian.
Unlike college savings plans, there is no penalty if account assets aren't used to pay for college. Once the minor reaches adulthood, the money is turned over to the minor and the minor will have full control of the assets and can use them for any purpose—educational or otherwise.
A minor's ownership of the custodial account can be a double-edged sword. Since the holdings count as assets, they may reduce a child's financial aid eligibility when they apply for college. 3 It could also reduce their ability to access other forms of government or community aid.
Some of the best college savings accounts include the 529 plan and the Coverdell ESA. All college savings accounts maintain different eligibility requirements and restrictions.
The chief disadvantage is that custodians lose control of the money once the minor reaches the age of majority. Having custodial accounts can also negatively affect the financial aid prospects of a child.
'Grandparent Loophole': This New FAFSA Rule Can Help Maximize College Savings. Starting this year, grandparent-owned 529 savings accounts won't be counted toward a student's FAFSA eligibility. Margaret Attridge is a news reporter for BestColleges focusing on higher education news stories in California.
In June 2022, the average 529 balance was $25,903. In June 2021, the average 529 balance was much higher at $30,287. The vast majority of 529 funds are in 529 college savings plans, not 529 prepaid tuition accounts.
UGMA accounts are subject to taxes just like any other investment account. This means that if your child earns interest, dividends, or capital gains from the money in the account, you may need to file a tax return to report that income on their behalf.
Adult custodians can withdraw money from custodial accounts for the direct benefit of the beneficiary. UGMA accounts are usually the natural choice for most families since they provide the same tax benefits with more flexibility.
Also, since UGMA and UTMA accounts are in the name of a single child, the funds are not transferrable to another beneficiary. For financial aid purposes, custodial accounts are considered assets of the student. This means that custodial bank and brokerage accounts have a high impact on financial aid eligibility.
The UTMA account belongs to the child, and the funds are irrevocable. You cannot close a UTMA account like your own account or a living trust. However, when the child reaches the age of majority, they may do whatever they want with the funds, including transferring the funds to another account.
The first $1,100 in earnings in the UTMA account are tax-free. This earnings figure includes dividends, interest income, and any capital gains. The next $1,100 in earnings is taxable at the child's tax rate. Because your child probably doesn't earn much income, their tax rate is typically 10%.
On a UTMA account, you can withdraw and can be made at any time for any reason without penalties. However, the income on the account is taxable to the child and may be taxed at the parent's tax rate if the child's unearned income exceeds $1,200 for the year.
A 529 plan can be treated as an asset on the FAFSA if: It is owned by the student. If you're considered an independent student and don't have any dependents (other than your spouse), your 529 account could reduce your eligibility for financial aid by up to 20%.
In general terms, your 529 investment strategy should have a higher proportion of assets allocated to high-risk investments like stocks (equity) when your child is younger, and gradually shift to an emphasis on low-risk asset allocation as they age and get closer to college.
For example, you might plan to save enough for: Tuition only (about 50% of the total cost for public schools; 75% for private schools). Room and board, books, and fees (about 50% of the total cost for public schools; 25% for private schools). The first 2 years of college (50% of the total cost).
And these rates usually average between 6% – 7%, which is a lot higher than even high-yield savings accounts. Ultimately, these accounts can help your kids learn a valuable lesson about how much more their money is worth in the future than it is today.
An UTMA account is reported as a student asset on the FAFSA. A 529 Savings Plan established by a parent with a child as the beneficiary is solely for qualified education expenses (or will incur a hefty 10% penalty plus additional taxes), and the owner of the account always maintains control of the account.
How to File Taxes for UTMA Accounts. If the child receives under $1,100 in unearned income — capital gains or investment income — in 2021, they don't have to report anything. However, if they earn more than $1,100 in 2021, a separate tax return must be filed on their behalf.
Colleges will expect parents to use up to 5.64 percent of their assets toward college. Protected Assets. The asset protection allowance was eliminated in the 2023-2024 FAFSA, which means all of a family's assets are taken into account in the federal aid calculation.
Custodial accounts can have a heavy impact on financial aid. Because the money in a custodial account is your child's asset and not yours, federal financial aid formulas consider 20% of the money available to pay for college. Compare this to 529 plans, which are given more favorable treatment for financial aid.
At 18, however, any child custodial accounts held for their benefit become immediately payable, unless age 25 is specified. Such custodial funds must be released regardless of whether it is in the child's best interest. Only a conservatorship of the person's estate could intervene to control such custodial funds.
No. Money and assets deposited into a custodial account immediately and irrevocably become the property of the child. In other words, you can't take the assets back or give the assets to someone else.
How Do Taxes Work with a Custodial Account? The child beneficiary technically owns the custodial account — not the custodian. It's the beneficiary's Social Security number that is attached to the account. Thus, the child is the one who technically needs to pay taxes.
Because assets held in a UTMA account are owned by the minor, this may have a negative impact when the minor applies for financial aid or scholarships.
You can liquidate the investments in the UGMA/UTMA account and invest all of the proceeds in a 529 plan (though you may incur tax liability). The key is that the proceeds must be used for the benefit of the same beneficiary.
The Federal government does not consider the income and assets of the non-custodial parent in determining a student's financial need. However, it does consider child support received by the custodial parent.
While the 529 is limited to education, that inflexibility may make it better in some cases. That's because a UTMA/UGMA account becomes the minor's at the age of majority. So the money can be used however the adult child sees fit with no restrictions and could be totally wasted.
Are UGMA/UTMA tax-deferred assets? UGMA and UTMA accounts are not tax-deferred assets. If the minor is under 18, or under 24 and a full-time student, the custodian can choose to report the UGMA/UTMA taxes on their income tax return.
You can liquidate the investments in the UGMA/UTMA account and invest all of the proceeds in a 529 plan (though you may incur tax liability). The key is that the proceeds must be used for the benefit of the same beneficiary.
529 plans do not have annual contribution limits. However, contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2023 up to $17,000 per donor ($16,000 in 2022), per beneficiary qualifies for the annual gift tax exclusion.
The UTMA does effect financial aid. Because the UTMA is in the child's name, it will lower financial aid significantly. It is more efficient to tax the parent's assets rather than the student's.
What Happens to an UTMA When a Child Turns 21? When the child beneficiary of a custodial account reaches the age of majority in your state, everything in the account will pass onto them.
Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child's—usually lower—tax rate, rather than the parent's rate.
The income from a custodial account must be reported on the child's tax return and is taxed at the child's rate, subject to the Kiddie Tax rules. The parent is responsible for filing an income tax return on behalf of the child. There is no special tax treatment for UGMA accounts.
Profit and prosper with the best of expert advice - straight to your e-mail. UTMA assets can be used for college costs, and that's one common goal. But the funds also could be used to pay for a trip to Europe, a wedding, a honeymoon, a down payment on a home…or a Corvette.
In this scenario, the low end 529 plan will be able to pay out between $9,600 and $10,000 per year, for each of the 4 years of school. Given that the college costs will rise, that should be about 50% of a 4-year public school tuition in 18 years.
Ideally, you should save at least $250 per month if you anticipate your child attending an in-state college (four years, public), $450 per month for an out-of-state public four-year college, and $550 per month for a private non-profit four-year college, from birth to college enrollment.
There's no timeline dictating when 529 funds have to be withdrawn, so if there's a chance your son or daughter might want to go to graduate school later, you can just leave excess 529 funds alone. As an added benefit, the money may continue to grow on a tax-deferred basis as long as it remains in the account.
Note: UGMA and UTMA accounts owned by the student are considered assets of the student, and must be reported as an asset of the student on the FAFSA, regardless of the student's dependency status. Do not include UGMA and UTMA accounts for which the student is the custodian but not the owner.
Can I use the account to buy a car for my child? Or to send the child to private school? Yes, you are allowed to use UTMA accounts for items included in a support obligation, regardless of what you read elsewhere. Does the minor have an absolute right to the money?
Introduction: My name is Terence Hammes MD, I am a inexpensive, energetic, jolly, faithful, cheerful, proud, rich person who loves writing and wants to share my knowledge and understanding with you.
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