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Exploring the 529 and the UTMA for College Savings Options

With the fall semester commencing, it’s an appropriate time to consider saving for your children’s college education. Whether they’re heading into high school or Kindergarten (like my oldest), it is never too early to begin thinking about saving for your child’s future. In this article, we will explore the different ways to save for your child’s future endeavors, whether college, the trade, or even their first home purchase.

Savings Vehicles

Like automobiles, different types of accounts are designed for other purposes. While a 4x4 is great for off-roading excursions, you would not want to use it in an F-1 race. The investment accounts available to you might not have such apparent differences, but those differences are worth knowing.

What is a 529

A 529 plan is a tax-advantaged savings account intended to help people pay for costs associated with education. While initially designed for college funding, it now can cover K-graduate school education and even apprenticeships. There are two main types of 529 plans: savings plans and prepaid tuition plans. Savings plans are tax-advantaged because they are tax-deferred and tax-free if withdrawals are made for qualified education expenses. Pre-paid tuition plans, however, allow the account owner to “lock in” the current tuition rate (most likely lower) for a later date. These, of course, are for higher education only. These also have some restrictions on exactly which institutions the funds can be used to attend.

529 plans are sponsored and run by the state where the account is held. All 50 states and the District of Columbia offer their own plans, and the plan rules and fees can vary from state to state. Account holders can open accounts directly with the state or through a broker or financial advisor.

Advantages of a 529

There are no limits on how much can be contributed to a 529 per year, but some plans cap the total amount that can be contributed over time, and you will have to pay “gift tax” if you contribute more than $17,000 in 2023. With a high contribution limit, these allow an account holder ample opportunity to save. There are tax savings to be had as well. While the contributions themselves are not federally tax-deductible, many states provide tax deductions or credits to 529 contributions. You must often invest in your home state’s 529 plan to receive these credits. Some states allow non-residents to participate in their plans, possibly sans tax credit. We say this because most states require you to contribute to your resident state plan to get the tax benefit, but currently, 9 states allow you to contribute to any state’s plan and still get the tax benefit.

Unused 529 balances can be transferred between immediate family members or first cousins. Additionally, SECURE Act 2.0 permits 529 balances of up to $35,000 to be rolled into a Roth IRA account beginning January 1st 2024. The only stipulation is that the 529 account must be at least 15 years old.

Disadvantages of a 529

529 plans are often invested in target date funds. When a high school graduate year is determined, the plan administrator selects a fund with a year on it, allocating some of the money in the investment to Equities (stocks and mutual funds) and another portion of it to fixed-income (Bonds and treasuries). The issue is that the funds selected are often underperforming, and the fixed-income allocation is not usually appropriate or beneficial to a client with a longer time horizon (10 years and up). If graduation for your 2-year-old is 16 years away, you may want to allocate more money to equities now and add fixed income to the portfolio when graduation draws nearer. In addition to some of the transfer and withdrawal restrictions associated with 529 accounts, it might be a better option to utilize an investment vehicle that is more customizable and user-friendly. In some cases, that might mean looking to a UTMA.

What is a UTMA

A UTMA Account or Uniform Transfers to Minors Act allows minors to receive gifts without the aid of a guardian or trustee (UGMA or Uniform Gifts to Minors Act). A UTMA enables the gift-giver to be a custodian or to appoint a custodian to watch over the account and its assets until the minor is of the age of majority. That age can be any that the custodian selects between 18 and 25, depending on the state rules. The gifts received through a UTMA avoid tax consequences until they reach legal age in their state of residency. The IRS allows for a gift-tax exclusion of up to $17,000 per person per year (2023). Any income earned will be taxed at the tax rate of the minor receiving the funds as a gift. Since the minor’s social security number is used to open the account and the child owns the account, this can negatively affect their standing for receiving financial aid in the future.

Advantages of a UTMA

The gift-tax exclusion is a significant benefit to the UTMA. If gifts are not more than $17,000 annually, they qualify for the exclusion. Another drawback for a donor to a UTMA is that the assets in a UTMA are counted as part of the donor’s taxable estate until the minor takes possession of the account. Money in a UTMA can be used for far more than educational purposes. This is perhaps the most significant difference from a 529 since that is for educational spending only. The UTMA can be untouched until the child reaches the legal age to take possession. In this case, the money becomes the beneficiaries and can be used to purchase a car or their first home. While the custodian is still in charge of the account, withdrawals may be taken for anything that benefits the child, like clothes, summer camp, or even piano lessons. The flexibility of the UTMA ensures that there is money to be utilized even if the child chooses not to attend college but instead enter the workforce after high school.

Disadvantages of a UTMA

A drawback for a donor to a UTMA is that the assets in a UTMA are counted as part of the donor’s taxable estate until the minor takes possession of the account. Another drawback is that it can sometimes be a laborious task to make a qualified withdrawal from the account while under the watch of the custodian. Finally, it's worth remembering that the growth is taxed in a UTMA, and no expense exempts withdrawals from taxation, like the 529’s federal tax exemption for education expenses. However, the first $1,100 of unearned income in the UTMA is tax-free, and the next $1,100 is taxed at the child’s tax rate. Any unearned income above that $2,200 is taxed at the custodian’s tax rate.


Generally speaking, there are other savings options for your child’s future. The Coverdell Educational Savings Account (ESA) has income and contribution limits, and contributions must stop when the child reaches 18. States do not offer tax benefits for contributing to an ESA like they often do for contributing to a 529. The other main difference between an ESA and 529 is that the ESA has many investment options available. Having the flexibility to pick investment options is a perk of the ESA. To learn more about the ESA, check out this article on our blog.

A taxable brokerage account does not offer the tax advantages of the other accounts we’ve discussed; it offers complete flexibility regarding investment options, contribution limits (there are none), and how the money can be used (however you wish). If your state does not offer a tax credit for contributions to a 529 and you don’t like the format of the UTMA, then a brokerage account could be a good option for you. Talk to a financial advisor today if you need help determining which strategy is right for you.

College Savings Options

August 24, 2023

Nick Allen

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