UTMA & UGMA Accounts vs. 529 Plans

March 15, 2024

The major differences between a Uniform Gifts to Minors Act (UGMA ) or Uniform Transfer to Minors Act (UTMA) account and a 529 college savings plan include the tax impact, the financial aid impact, account ownership, and permitted uses. 529 plans have more tax advantages and favorable financial aid impact while also giving the parent 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 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	A 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 based on earnings on an annual basis, with some Kiddie Tax benefits, which allow limited earnings to be taxed at the child’s tax rate.	Earnings accumulate tax-deferred 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.	It is usually reported as a parent asset on the FAFSA, reducing aid eligibility by up to 5.64% of the asset value.
Can Change Beneficiary?	No.	Yes, to a member of the family of the old beneficiary.
Contribution limits	None. Contributions subject to gift tax exemption limits.	No annual limits. Lifetime limits of $235,000 to $550,000+, depending on 529 plan state. Contributions are subject to gift tax exemption limits.
Investment Options	Unrestricted. May include cash, stocks, bonds, mutual funds, ETFs, etc. UTMAs may include real estate.	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).

A 529 plan is the best option if the child goes to college, while a UGMA or UTMA account provides more flexibility if the child does not.

UGMA/UTMA Account Overview

The UGMA was originally created as an alternative to trust funds for families with limited assets. It 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 the UTMA account. This also expanded the definition of what property could be left to children through these accounts.

Parents usually utilize these accounts to gift their children a significant amount of money or property that they can entirely access until they reach adulthood. People use these accounts for much more than just paying for college, and they provide flexibility in what their children can use funds for when they reach adulthood.

Overview of a 529 Plan

A 529 plan was created to provide money for a child to go to college. It’s exclusively a college savings tool, and all its benefits are used to pay for those 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 beneficiary’s name to a different child’s name to pay for 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 withdraw the money from 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. Only about 10% to 20% should be invested in stocks when the child is a high school senior. 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: A UTMA plan may have fewer 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. State income tax deductions and tax credits can function as a discount 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 will likely impact your overall financial aid eligibility less than a UTMA account.

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 will be used. If you’re confident that the account will 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 your account’s investments to maximize the potential return.

The Bottom Line

A 529 plan and a UTMA account aren’t typically used for the same thing. A UTMA account transfers 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 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, a 529 plan offers more tax and financial aid benefits than a UTMA.

Should I have both a 529 and UTMA account?

That depends on what you want to accomplish. You can have both accounts if necessary, and if you want to transfer money to a child for more than just college, you may want to consider the benefits of opening both accounts.

Who pays the taxes on a UTMA account?

The child owns the money held in a UTMA, so it will be filed under the child’s taxes and charged at the child’s rate. The account’s custodian will make sure those taxes are taken care of from the account.