Saving for School: 529 Plan vs. UTMA/UGMA

As you begin to save for your child’s education, the first step can be the most difficult: choosing a savings plan. You may have heard the terms “529,” “UTMA,” and “UGMA” rise to the top of the savings conversation, but what sets these apart from the rest? Which is the best choice as you plan for the future?

The pros and cons listed below will provide a framework for your decision, but each family’s situation is unique, and there is far more information available about each plan than we can include in one article. If you have questions, our financial professionals can provide individual guidance to be sure you’re making the most of your savings decision.


UTMA accounts were created under the Uniform Transfers to Minors Act of 1986, and allow for large gifts (including real estate or other investments) to be made to minors while qualifying for gift tax exclusion. Some states offer UGMA (Uniform Gift to Minors Act) accounts, which are extremely similar to UTMAs. They differ only in the types of acceptable asset contributions.

Using these funds on education does not lead to special benefits for the parent or the student; withdrawals are subject to income taxes regardless of their intended purpose and there are no stipulations on expenditures. The balance of a UTMA/UGMA is considered the asset of the student, not of the parents.


  • The funds in a UTMA/UGMA account can be used for any purpose.
  • The first $1,000 of investment income is tax-free and the next $1,000 is taxed at the child’s rate (generally lower than that of the parents.) Any investment income past this level is usually taxed at the parent’s tax rate.
  • A UTMA/UGMA is open to investments of many kinds and therefore offers greater flexibility and investment choices than a 529 plan.


  • Since the funds in a UTMA/UGMA are technically the asset of the student, they are given more weight in the federal financial aid calculation (20% vs. 5.64%). This could impact the amount of financial aid for which you qualify.
  • When a student turns 18 or 21 (depending on the state) control of the account is immediately and permanently transferred from the parent to the student and cannot be transferred back or to a third party. This means the funds cannot be transferred to another child or beneficiary if they are not needed for the original child’s education.
  • Income produced by UTMA/UGMA accounts (including interest, dividends, and capital gains) are taxed as income to the child.
  • When a student begins to use a UTMA/UGMA to pay for college, the capital gains generated will require that a tax return be filed on the student’s behalf. All unearned income over $2,000 will be subject to the “kiddie tax” and taxed at the higher of the child’s or parent’s marginal tax rate.

529 PLAN

A 529 plan is a state-issued account that has been created under Internal Revenue Code Section 529. This plan allows for tax-free growth and withdrawals provided that the money is used for approved educational expenses, which include tuition and fees for elementary school, secondary school, college, trade school, and graduate school. A 529 plan may also be used to fund off-campus housing, books and supplies, required computers and computer software, internet service, and equipment and services required by a special-needs student.


  • A parent remains in control of the account even after the student turns 18.
  • A 529 plan may be transferred to a sibling or other related beneficiary, used by the parent, or saved for a future grandchild in the event that a student no longer wishes to use the funding for education.
  • In certain states, a contribution to a 529 plan is rewarded with a significant deduction on the state income tax return.
  • The balance of a 529 plan is considered the parents’ financial asset, not the student's. Thus, it is given less weight in the financial aid calculation, making it easier for the student to qualify for aid.


  • If funds withdrawn from a 529 plan are used for unapproved expenses they will receive a 10% penalty and will be subject to federal income tax. This will also apply if the funds go unused by the student and are ultimately withdrawn from the account.
  • The beneficiary must be taking enough credits to be considered at least a ½ time student for funds to be withdrawn.

The descriptions above outline the general tenets of 529 and UTMA/UGMA plans, but keep in mind that the details of each plan vary. Be sure to do the research to confirm what your state offers and understand how these plans apply to your specific situation - our 529 Comparison Tool is a great place to start. We recommend you check with your financial advisor before entering into one of these plans. If you don’t have a trusted financial advisor, we encourage you to consult with one of our expert college planners. They can answer any questions you might have and help you every step of the way along your college journey.

Grace Becker

Content Marketing Intern