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Comparing a 529 Plan and a UGMA/UTMA Account?

December 17, 2018

Many parents set aside money for their child’s future, whether it’s for education or personal expenses. If you’re saving for college, deciding which type of savings account to use is not an easy feat. Age restrictions, contribution limits, and how the account will affect your child’s eligibility for federal financial aid programs are things to consider before choosing an account. UGMA/UTMA accounts and 529 plans are two options for saving for college. Both accounts have no income restrictions allowing any parent to create a savings account for their child.

What is a 529 plan?

A 529 plan is a tax-advantaged investment account that allows you to accrue earnings tax-free on after-tax contributions. You can contribute as much you want each year up to the lifetime maximum (usually $200,000 - $500,000, designed to cover the entire cost of college), but annual contributions that exceed $15,000 may be subject to taxes. 529 distributions are tax-free as long as the money is used on qualified expenses, which include tuition, books, computers, required equipment, and room and board.

There are no time or income requirements about when the money must be used. If your child decides not to go to college, you can change the beneficiary to an eligible family member. The parent retains control of the 529 plan at all times, and as long as the money is used for qualified expenses, it is not subject to tax. You can also withdraw the funds to be used for any purpose subject to a 10% penalty tax in addition to federal and state income taxes.

What is a UGMA/UTMA Account?

The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) are a type of custodial savings accounts for minors. An advantage over the 529 plan is that the custodial account is not specific to education. It can be used for any expenses for the beneficiary. However, earnings are taxed at the parent’s rate once they exceed $2,100. There are no contribution limits.

One key feature of UGMA/UTMA as a custodial account is that it is an irrevocable gift to the minor. Depending on the state of residence, the beneficiary will receive full access to the account between ages 18-24 and may choose to use the money how they please. A beneficiary cannot be forced to use the money for college. Furthermore, a parent may only make withdrawals to use for the beneficiary.

In addition to being taxed, another disadvantage to using the UGMA/UTMA account to pay for college is how it’s assessed on the FAFSA application. While 529 plans are generally considered a parental asset (even if a dependent student owns the plan), UGMA/UTMA’s are considered a student asset and assessed at a higher rate (20%). 529 plans and other parental assets are only assessed at 5.64%. A UGMA/UTMA account could therefore have a significant impact on a dependent student’s financial aid package.

For example, if you have $100,000 in a 529 plan owned by a custodial parent or a dependent student, it’s only assessed at $5,640. However, if you have $100,000 in a UGMA/UTMA account, it’s assessed at $20,000. In other words, if you had a UGMA/UTMA account, your child would be expected to cover nearly one semester of college tuition at a private school. On the other hand, if you had the money in a 529 plan, it would only account for a small portion of the semester fees, such as room and board and books.

Key Differences Between a 529 Plan and UGMA/UTMA Accounts


529 College Savings

UGMA/UTMA Accounts

Age Requirement


Beneficiary gains control of the account between 18-21


No taxes on earnings used for qualified expenses, subject to gift tax

After $2,100 in earnings taxed at custodian’s rate, subject to gift tax

Qualified Expenses

up to $10,000 tuition K-12 tuition; post-secondary tuition, books, computers and laptops, printers, internet, room and board, required equipment

No constraints, not limited to educational expenses

Gift Tax

Subject to $15,000 per person, $30,000 per couple, Can give a lump sum five year gift of $75,000 per individual, $150,000 per couple

Subject to $15,000 per person, $30,000 per couple, Cannot give lump sum gift

Change Beneficiary

Yes, to an eligible family member


Contribution Limit

Up to lifetime max set by the plan, typically $200,000 to $500,000


Financial Aid

Parental asset, assessed at 5.64% of account value

Student asset, assessed at 20% of account value

Should I open a UGMA/UTMA Account?

UGMA/UTMA accounts offer an excellent opportunity to set money aside for your child, but the accounts do not offer the benefits that a 529 plan provides for college savings. If you want to set aside money for your child’s future, and you’re okay with them deciding how to use the money, a UGMA/UTMA account may be a good fit. However, if you want your child to use the money for college or if you are sure that is what they plan to do, a 529 plan offers better financial benefits to cover educational expenses.