Differences between UGMA and UTMA Accounts and 529 Plans

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Mark Kantrowitz

By Mark Kantrowitz

August 3, 2020

The major differences between an 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.

This table summarizes the differences between UGMA and UTMA accounts and 529 plans.

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 non-qualified 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
Yes, to a member of the family of the old beneficiary
Investment Options
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 an UGMA or UTMA account provides more flexibility if the child will not be going to college. 

The choice between a 529 plan and another type of investing vehicle may change when college enrollment is just a few years away.

  • 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. 
  • Lower fees vs. tax breaks. Around the time the child enters high school, state tax breaks available on in-state 529 plans matter more than having lower fees on an out-of-state 529 plan. The state income tax deductions and tax credits can function like a discount on tuition. UGMA and UTMA accounts do not offer similar tax breaks.

However, the financial aid treatment of 529 plans still provides a significant advantage, even if the difference in investment returns is much narrower. 

If you’ve determined that a UGMA account is right for you, Acorns can help you open an account in under 3 minutes. Acorns Early is an investment account for children, where you can set up recurring investments (either daily, weekly, or monthly) starting as little as $5. For families with multiple children, you can add additional kids at no added cost. 

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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