UGMA vs. 529: Which Account is Better?

Saving for your child’s future involves many options and a lot of research. The Uniform Gift to Minors Act (UGMA) and 529 college savings plans are two common accounts.

The UGMA vs. 529 debate is big today as parents plan their child’s next move. The UGMA is an irrevocable trust account that you can use for any purpose, while the 529 focuses more on saving for college.

Both offer tax benefits and potential growth opportunities, so it’s important to weigh the pros and cons of each before deciding which one is best for you. Read on as we give you the differences and advantages of each.

What is a UGMA?

A UGMA is an unchangeable trust account that holds money or other assets for a minor until they reach the age of majority. Contributions to a UGMA are gifts, and the minor owns the money account rather than their parents or guardians.

They can use the funds in a UGMA for any purpose, including education expenses. Compared to a Vanguard cash account, there is no limit on how much money you can contribute to a UGMA.

Moreover, a UGMA has fewer restrictions on how parents or the child can use the money. At the same time, a Vanguard account restricts withdrawals from its cash account to certain types of qualified expenses or investments.

A Fidelity cash account is a savings account with features similar to a Vanguard UGMA account. Generally, you can use the funds from your Fidelity custodial account for any purpose.

However, if you are using the funds for education expenses, there may be restrictions on which expenses qualify for tax-free withdrawals.

Advantages of UGMA Accounts

• Simple to open: UGMA accounts are easy to open. All you need is some paperwork, money, and the custodian’s signature (if under 18).
• No contribution limits: UGMA accounts have no contribution limits, unlike other savings accounts. This makes them extremely attractive to those who want to save money simultaneously.
• No withdrawal limits or restrictions: UGMA accounts also have no withdrawal restrictions or limits. This makes them perfect for those who need access to their money quickly.
• Flexibility: UGMA accounts are incredibly flexible, meaning you can use the money however you see fit. This is great for those who want to ensure the money goes toward what best suits their needs, such as real estate or mutual funds.
• Allow parents to skip the trust process: Setting up a trust can be expensive, time consuming and complicated. UGMA accounts allow parents to skip this entirely, making it easier to ensure their children are in good standing in the future.
• Assets automatically become the child’s property: UGMA accounts are set up so that the child automatically receives account ownership once they reach adulthood.

Disadvantages of UGMA Accounts

• Irrevocable: UGMA accounts are irreversible, meaning that once the money is in the account, it stays there. This can be an issue if parents have a change of heart and decide they want their parental assets to go somewhere else.
• No tax benefits: UGMA accounts do not come with any tax benefits, which can be a disadvantage when compared to other savings options.
• Impact on college financial aid: UGMA accounts could impact student aid because the money in the account is counted as the student’s assets, which could reduce the number of student loans they are able to receive.

What is a 529 Plan?

A 529 savings plan helps parents and other family members save for their children’s college education. The money put into a 529 plan grows tax deferred, and you can withdraw it tax free as long as you use it for qualifying higher education expenses.

This makes 529 plans attractive for those who want to save for college without worrying about taxes. However, you must use it strictly for educational purposes.

Compared a Vanguard cash account, 529 plans offer more tax advantages. Vanguard cash accounts have limited options for growing money, as the interest rate is usually low.

Advantages of a 529

• No annual contribution limits: One of the biggest benefits of a 529 plan is that there are no annual contribution limits. This means you can save as much as you want in a 529.
• Flexible plan location: You can open a 529 in any state, which makes it easy to pick the plan that best fits your budget.
• Easy to open and maintain: All you need to open a 529 is basic information about your child, a few documents, and the ability to deposit money into the account (the minimum deposit is usually around $25).
• No age limit for contributions or distributions: There is also no age limit for contributions or distributions. You can save for college as early as you’d like and withdraw the money when your child is ready to attend college.
• Tax-deferred growth: A 529 plans offer tax breaks, meaning your money can grow without worrying about state, federal or gift taxes.
• Tax-free withdrawals: If you use the money for qualified higher education expenses, your withdrawals are tax free.
• Tax-deductible contributions: Depending on where you live, 529 plans may offer tax-deductible contributions without incurring tax penalties.

Disadvantages of a 529

• Cannot lock in tuition costs: A 529 plan cannot lock in tuition costs. This means that if tuition prices rise, your savings might not cover the total cost of college.
• Charges fees: A 529 plan may also come with fees, which can cut your potential earnings.
• Limited investment options: 529 plans may also have limited investment options, meaning you might be unable to find the exact fund you want if it’s not for qualified education expenses.
• Different fee levels per state: The charges associated with 529 plans vary from state to state. Be sure to research each plan thoroughly before investing your money in one.
• Must use it for education: You must use 529 plans for qualified higher education expenses; if not, the money will be subject to taxes and penalties.
• Restriction on switching investments: 529 plans may have restrictions on switching investments, limiting your ability to grow your money.

529 vs. UGMA Account: How Do They Compare?

A 529 plan and a UGMA account have advantages and disadvantages. This chart will give you a good sense of how the two compare:

529 Plan	UGMA Account
Tax-deferred growth	Flexibility
Flexible plan location	No contribution limits
Must be used for education	No tax benefits
Cannot lock in tuition costs	Irrevocable

Which is Better: UGMA or 529?

The UGMA and 529 are good options for saving for college, with some key differences, but it ultimately comes down to your own needs and preferences.

Choose a UGMA If:

• You plan to use the funds for college and don’t need access until then.
• You want the flexibility to decide later how to use the funds.
• You want to retain full control of the account since it’s in your name and not your child’s.

Choose a 529 Plan If:

• You want to use the funds exclusively for college expenses.
• You don’t need access to the money until your child’s college years.
• You want to take advantage of tax benefits such as state tax deductions and federal income tax-free withdrawals and avoid capital gains tax.

FAQs

Below are some frequently asked questions about UGMA vs. 529 accounts.