Quick Guide: 529 vs UGMA/UTMA

Key facts

  • If your primary goal is to save for college, a 529 plan is usually the best option because of its superior tax benefits and relative flexibility
  • 529 Plans allow for tax-free growth while UGMA/UTMAs are subject to annual tax
  • 529 Plans allow for “superfunding” while UGMA/UTMAs do not
  • 529 Plans permit beneficiary changes while UGMA/UTMAs do not
  • If you aren’t saving specifically for college, a UGMA/UTMA account may be a better option because it can be used by the beneficiary for any type of expense (while a 529 is limited to qualified college expenses)

There are several ways to save for your children’s educations, but deciding which plan best fits your needs can be challenging. Two popular choices include the 529 college savings plan and UGMA/UTMA custodial accounts. Each program has features around tax advantages, account ownership, funding options, and beneficiary selection that can drastically change how funds are used in the long term.

529 College Savings Plan Features

The 529 college savings plan is a tax-advantaged account that permits individuals to contribute towards beneficiaries’ education expenses. Though it was created through federal tax code, each state has its own version of the 529 program. There is typically no residency requirement, so you can choose from any plan offered nationwide based on the fee structure and investment options you prefer.

Due to a feature known as “super funding”, a 529 plan is ideal for setting a large amount of money aside for the sole purpose of covering secondary education expenses. Maximum contributions per beneficiary are quite high, ranging from approximately $200,000 to $500,000, depending on the state.

The most popular 529 feature is tax-free earnings at the federal level, in addition to any tax benefits offered by the state. Also, you can change the beneficiary of your 529 plan without incurring federal income tax or penalty if the new beneficiary is an eligible family member of the original beneficiary. Thus, you can easily respond to changes in educational circumstances. One of the most important aspects of a 529 account is that the account owner always maintain ownership. While there are restrictions on how funds must be used for qualified educational expenses to preserve tax advantages, the ownership rule ensures that money is spent as you intended.

UGMA/UTMA Account Features

UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) accounts are a little different. While they make good college savings vehicles, funds can be used for any purpose. There are tax advantages for UGMA/UTMA earnings, as well. The first $1,050 in earnings is tax free, the next $1,050 in earnings is taxed at the child’s rate, assuming she has no additional income, and the remaining earnings are taxed at the custodian’s rate.

Unlike 529 accounts, the selection of your UGMA/UTMA beneficiary is a permanent decision, and the beneficiary gains control of the funds when she reaches the age of majority. This limits the amount of control you have over the money once the beneficiary becomes an adult, so you can’t guarantee how funds will be used.

529 vs UGMA/UTMA

When making your decision between a 529 college savings plan and a UGMA/UTMA account, the first question to consider is how you want your contributions to be used. Funds in a 529 account are exclusively intended for education expenses, while funds in a UGMA/UTMA can be used for any purpose.

Next, consider whether you want to maintain control of the account until savings are withdrawn. You maintain ownership of a 529 account until funds are distributed. The beneficiary makes all decisions about a UGMA/UTMA account when she reaches the age of majority. As you decide whether you want flexibility in how funds are used and whether you want to maintain control of the account, bear in mind that the 529 plan offers an option to change your beneficiary, while the UGMA/UTMA does not.

Finally, consider how tax ramifications of each account type will impact overall performance. The 529 plan offers tax-free earnings, along with possible state-specific tax incentives to make contributions. The UGMA/UTMA requires that taxes be paid on earnings above the specified limit.


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This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.

Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.