When deciding how to save for your child’s future, understanding your options is key. UTMA accounts and 529 plans are two popular choices, but they serve different purposes and come with unique benefits. Here’s how these two options compare to help you choose the best fit for your family.
UTMA vs. 529: At a glance
| Tax exemptions | Earnings taxed at the child’s rate (kiddie tax applies above certain thresholds) | Earnings grow tax-free and are tax-exempt if used for qualified education expenses |
| Contribution limit | No contribution limit, but gift tax applies above $18,000 per donor | Gift tax applies above $18,000 per donor; overall contribution limits vary by state |
| Contributor income limit | None | None |
| Investment options | Wide range of options, including stocks, bonds and mutual funds | Limited to state-specific plans with preselected portfolios |
| Flexibility with proceeds | Can be used for any purpose that benefits the child | Must be used for qualified education expenses to retain tax benefits |
| Control and ownership | Transferred to the child at the age of majority | Owned and controlled by the parent or guardian |
What is a 529 plan?
A 529 plan is a tax-advantaged savings account designed specifically for education expenses. These plans are typically sponsored by states or educational institutions, allowing contributions to grow tax-free if used for qualified expenses like tuition, books and room and board.
Control of the account remains with the parent or guardian, ensuring the funds are used appropriately. Additionally, 529 plans are considered parental assets for financial aid purposes, minimizing their impact on a student’s eligibility for aid.
Pros
- Tax-free growth for education expenses. Contributions grow tax-free if used for qualified expenses, providing significant savings over time.
- State tax deductions. Many states offer tax deductions or credits for contributions, adding an extra financial benefit.
- High contribution limits. Generous limits allow substantial savings for future education costs.
- Minimal financial aid impact. Classified as a parental asset, it often has a smaller effect on financial aid eligibility.
Cons
- Restricted use. Funds must be used for qualified education expenses to avoid penalties and taxes.
- Limited investment options. Choices are often restricted to the portfolios offered by the specific 529 plan.
- Penalty for non-educational use. Non-qualified withdrawals incur a 10% penalty and income tax on earnings.
What is a UTMA account?
A UTMA (Uniform Transfers to Minors Act) account is a custodial account that allows parents, guardians or other adults to transfer assets to a minor without creating a trust. These assets can include cash, stocks, bonds and even property. The account is managed by the custodian until the child reaches the age of majority, at which point full control transfers to the child.
Earnings in a UTMA account are subject to the child’s tax rate, but the “kiddie tax” applies to earnings above a certain threshold, potentially resulting in higher taxation.
Pros
- Broad flexibility. Funds can be used for any purpose that benefits the child, not just education expenses.
- No contribution limits. Allows significant gifts without constraints, enabling diverse funding strategies.
- Wide investment choices. Offers a range of options, including stocks, bonds and real estate.
Cons
- Full control at majority. The child gains unrestricted access to the funds upon reaching adulthood, which may pose risks.
- Tax implications. Earnings are subject to taxation under the kiddie tax rules, potentially reducing returns.
- Financial aid impact. Considered the child’s asset, which can significantly reduce financial aid eligibility.
What is a UGMA account?
A UGMA (Uniform Gifts to Minors Act) account is a type of custodial account that allows adults to transfer financial assets to a minor without the need for a trust. Like a UTMA account, a UGMA account is managed by a custodian until the child reaches the age of majority, at which point full control transfers to the beneficiary.
The main difference between UGMA and UTMA accounts lies in the types of assets they can hold. UGMA accounts are limited to financial assets such as cash, stocks and bonds, whereas UTMA accounts can include additional assets like real estate. UGMA accounts are often preferred for straightforward financial gifts or smaller investments, making them a practical option for parents or guardians seeking a simpler approach to saving for a child’s future.
Pros
- Simplified gifting process. UGMA accounts provide an easy way to transfer financial assets to a minor without the need for a trust.
- No income limits for contributors. Anyone, regardless of income, can contribute to the account, making it accessible to a wide range of families.
- Flexibility with funds. While more limited in asset options than UTMA accounts, UGMA funds can still be used for any purpose that benefits the child.
- Lower taxation. Earnings are taxed at the child’s rate, which is typically lower than the custodian’s rate.
Cons
- Limited asset options. UGMA accounts can only hold financial assets, excluding property or other types of investments available in UTMA accounts.
- Full control at age of majority. Like UTMA accounts, the funds are transferred to the child when they come of age, posing potential risks of misuse.
- Financial aid impact. As the child’s asset, UGMA accounts heavily impact financial aid calculations, reducing eligibility for aid.
- No tax-free growth. Unlike 529 plans, UGMA earnings are subject to annual taxation, reducing overall returns.
529 vs. UTMA: Which is better?
Choosing between a 529 plan and a UTMA account depends on your financial goals, the intended use of the funds and your child’s future needs.
While 529 plans excel in providing tax-advantaged savings for education, UTMA accounts offer broader flexibility and investment options for other expenses. Below, we break down which account might be better suited for different scenarios.
A 529 plan is better for maximizing education-specific tax benefits
One of the biggest advantages of a 529 plan is its tax benefits for education savings. Contributions grow tax-free, and withdrawals for qualified education expenses — such as tuition, books and room and board — are also tax-exempt.
Additionally, many states offer deductions or credits for contributions to their own 529 plans, adding an extra layer of savings. For example, New York residents can deduct up to $5,000 ($10,000 for married couples filing jointly) in contributions from their state taxable income as of 2024.(1)
Moreover, the flexibility of 529 plans has expanded in recent years. Qualified expenses now include up to $10,000 per year for K-12 tuition and a lifetime maximum of $10,000 in student loan repayments per beneficiary as of 2024.(2) These updates make 529 plans an excellent long-term option for families planning for education costs from elementary school through post-college.
A 529 plan may impact financial aid calculations less than a UTMA
529 plans are considered parental assets, meaning only a small portion of their value is factored into financial aid eligibility — up to a maximum of 5.64% of the account balance.
In contrast, UTMA accounts are treated as the child’s assets, which are assessed at a much higher rate of 20%. This stark difference can significantly reduce the amount of financial aid a student qualifies for when savings are held in a UTMA account.
If a family saves $50,000, the financial aid reduction from a 529 plan would be around $2,820, compared to $10,000 with a UTMA account. This calculation demonstrates how a 529 plan can preserve financial aid eligibility while still providing robust savings for education.
A 529 plan is better for parents who want ongoing account control
529 plans allow parents to retain full control over the account’s funds, regardless of the child’s age. This control ensures the savings are used exclusively for education-related expenses or other qualified withdrawals. Parents can also decide when and how to use the funds, providing peace of mind that the savings won’t be misused.
In contrast, UTMA accounts automatically transfer ownership to the child upon reaching the age of majority, which varies by state but is often between 18 and 21 years old. While this transition encourages financial independence, it removes the parents’ ability to oversee how the funds are spent. For families prioritizing responsible, education-focused savings, the ongoing control offered by 529 plans is a significant advantage.
A UTMA is more flexible for non-education expenses
Unlike 529 plans, which are restricted to qualified education expenses to retain tax benefits, UTMA funds can be used for almost any purpose that benefits the child. This includes covering costs such as a first car, extracurricular activities, travel or even a down payment on a home.
This flexibility makes UTMA accounts an appealing option for families who want their savings to cover a broader range of potential needs.
For example, parents may use UTMA funds to support their child’s passion for music lessons or athletic programs, which might not be covered under a 529 plan. This versatility is particularly valuable for families uncertain about their child’s long-term educational plans or who prioritize comprehensive support over specific education funding.
A UTMA allows for broader investment choices
Unlike 529 plans, which typically limit investment options to preselected portfolios offered by the state, UTMA accounts provide parents and custodians with the ability to diversify across a broad range of assets.
These include individual stocks, bonds, mutual funds, exchange-traded funds (ETFs) and even alternative investments like real estate. This flexibility allows families to tailor their investment strategy to their risk tolerance and financial goals.
Parents with a long-term investment horizon may choose to allocate UTMA funds toward high-growth stocks or index funds. Alternatively, those seeking stability might opt for bonds or dividend-paying assets. The ability to mix and match investments in a UTMA account can lead to potentially higher returns compared to the restricted choices available in 529 plans, depending on market performance.
A UTMA provides full control to the beneficiary at the age of majority
While transferring full control to the beneficiary at the age of majority can be seen as a drawback, it also presents an opportunity for young adults to gain financial independence and learn money management skills.
Once the child reaches the designated age (typically 18 or 21, depending on the state), they can decide how to use the funds, whether for education, starting a business or another significant expense.
This feature can be especially appealing to families who value financial autonomy and trust their children to make responsible decisions. For instance, a beneficiary might use the funds to pursue entrepreneurial ventures, invest further or cover personal milestones like moving out or paying for a wedding.
Compare the best kids’ investment accounts
Finding the right account for your child’s future savings is essential. Comparing options like UTMA accounts, 529 plans and other kids’ investment accounts can help you make an informed choice based on your goals, whether it’s education savings, broader financial flexibility or teaching financial responsibility.
Bottom line
Both UTMA accounts and 529 plans offer valuable ways to save for your child’s future, but the right choice depends on your goals. For families focused on education-specific savings, 529 plans offer unbeatable tax advantages. However, UTMA accounts shine with their flexibility and broader investment options, making them a versatile alternative for non-education expenses.
Explore your options further with our guide to investing for kids to find the best fit for your family’s financial goals.
Frequently asked questions
What happens to a 529 plan when my child turns 18?
A 529 plan remains in the control of the parent or guardian regardless of the child’s age. The funds can continue to grow tax-free until they are used for qualified education expenses or rolled over to another beneficiary.
What happens to a 529 plan if my child doesn’t go to college?
If the funds are not used for education, they can be withdrawn with a 10% penalty on earnings, plus taxes. Alternatively, the plan can be transferred to another eligible family member, such as a sibling, without penalty.
