UTMA vs 529: Which is Best for My Child?

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uta vs 529

When it comes down to the difference between UTMA vs 529 plans, both options provide families with a way to fund their children’s educational futures. But each savings account is different in its own way, including in terms of the tax benefits and investment opportunities each one offers. 

As such, identifying which plan will work better for your family can be tricky, but that’s why we’re here! Let’s explore the differences between UTMA vs 529 plans. 

What is UTMA?

UTMA stands for the Uniform Transfers to Minors Act. This piece of legislation permits minors to receive gifts without a formal trust or assistance from their guardians. 

Additionally, a UTMA savings account permits people to gift assets to minors of their choice. People can also become custodians over the UTMA accounts of minors until they are of age and can take over the custodial obligations themselves.  

What is a 529 plan?

A 529 plan is a tax-advantaged account that makes investing for college and other educational expenses a lot more manageable. In fact, 529 plans are sponsored by states and various educational institutions under Section 529 of the IRS Code. 

Though the specific options available to you will depend on the state you live in, you should have access to one of two types of 529 plans:

  • Prepaid tuition plans allow account holders to purchase credits from higher education institutions to cover future tuition and fees at their current prices. 
  • Education savings plans allow savers to open investment accounts to cover qualified educational expenses beginning with elementary school. 

While savings plans cover room, board, the costs of elementary school, and secondary schooling expenses, tuition plans do not. 

Is 529 or UTMA better?

Generally speaking, whether a 529 plan or a UTMA savings account is better for you will fully depend on your savings goals. Typically, UTMA savings accounts come with fewer tax advantages for recipients. 

That said, UTMA assets can fund non-educational expenses without additional tax implications. By contrast, 529s come with better tax advantages seeing as growth and withdrawals are tax-free. 

But if you spend the money you withdraw on anything other than qualified educational expenses, you may incur taxes as well as penalties. 

UTMA vs 529 plan comparison

Before you decide which plan works for you, it’s important to understand the differences between UTMA vs college fund 529 plans. 

Investment purpose

UTMA savings accounts can fund any purchases that your child wants to make once they reach the age of majority, which is usually somewhere between eighteen and twenty-one. By contrast, 529 plans can only fund qualified educational expenses. Otherwise, you could accrue income taxes and a 10% federal penalty in response. 

Account control

UTMA custodial accounts grant account holders the right to dictate how investments and asset transfers are managed until the child becomes of age. But with a 529 plan, the account holder controls funds regardless of the beneficiary’s age, and can even name a new beneficiary at their discretion. 

Investment opportunities

UTMA custodial accounts allow savers to gift any combination of securities or real assets to children they know, and these assets or securities can include the following:

  • Cash
  • Stocks 
  • Bonds
  • ETFs
  • Mutual funds
  • Real estate
  • Artwork
  • Patents
  • Royalties 

In contrast, 529 plans only allow you to contribute cash into the 529 accounts. From there, the account holders can invest in securities provided by the 529 plan, such as stocks, bonds, mutual funds, and principal-protected bank products. 

What’s the difference between UTMA and 529 accounts?

When it comes to UTMA savings accounts vs college fund 529 plans, custodians should keep these key differences in mind. 

529 plans UTMA saving accounts 
Maturity dateN/ABetween the age of maturity to the age of 25
Tax benefits Up to $10,000 per year in tax-free withdrawals to put towards elementary and secondary school education expensesUnlimited tax-free withdrawals for qualified higher education expenses$15,000 per year in federal gift tax exclusions for saversThe first $2,200 in annual withdrawals is subjected to the lower-rate Kiddie Tax.
Contribution limits Maximum lifetime contributions up to $529,000 None
Financial aid impactDependent accounts are regarded as parental assets when filling out the FAFSA.Regarded as the child’s income when applying for financial aid
Asset transferCustodians may transfer assets to other beneficiaries.Custodians cannot transfer assets to other beneficiaries but may transfer to other accounts, such as 529 plans. 
Termination dateN/ABetween 18 and 21 depending on the state

4 alternative ways to save for your child’s future

If you’re still worried about investing for your child’s future, consider one of these alternative options instead. 

Investment account

Whether you’re investing for college or investing in college, a regular investment account can help you save for the future. If you’re ready to take this step, you can open a MoneyLion investing account as early as today! 

Whether you want to diversify your holdings with ETFs, take advantage of effortless auto-investing, or just dabble in the market, you can get started with as little as $5. Invest when you want with MoneyLion! 

Roth IRA

Roth IRAs are designated retirement savings accounts that come with unique tax advantages. Specifically, the government taxes your contributions rather than your withdrawals, meaning that when you retire, you can pull out your funds tax-free. 

Savings bond

When you buy a U.S. savings bond, you’re essentially loaning money to the United States government. In return, they agree to pay you back in full, including interest. While you probably won’t get rich on savings bonds, they’re a safe way to preserve your capital. 

Direct savings account

It never hurts to make a little extra money in college. And once you have it, your next goal should be saving wisely. 

A direct savings account with MoneyLion makes that easy. With our Financial Safety Net feature, you can access your funds, investments, emergency InstacashSM loans, and credit-building loans all from a single app. 

Unsure if a UTMA vs 529 is right for you? Ask!

When it comes to choosing a UTMA savings account vs college fund 529 plan, the best choice for you will depend on your needs and your goals. If you’re keen on investing for college, a 529 plan will offer better benefits for your situation. 

However, UTMA accounts come with more custodial controls. But if you’re still not sure which investment account to pick, then it might be time to visit a trusty financial advisor who can help you hash out the details!

Frequently Asked Questions

How is a UTMA taxed?

Typically, you can withdraw the first $1,100 of annual unearned income tax-free, while the next $1,100 will be taxed at the child’s taxed rate. Annual withdrawals that exceed $2,200 will be taxed at the parent’s tax rate.

What happens to a UTMA account when a child turns 18?

UTMA accounts are transferred to the recipient and legally placed under their name with custodial consent at the age of 18. Otherwise, the recipient can remove the custodian at the age of termination, which ranges from 18 to 21.

What happens to a 529 plan if not used?

If you have leftover funds or the account has never been used, the savings can be transferred to another beneficiary’s account. However, your state of residency will have limits regarding which people and which accounts can receive the funds tax-free.

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