UTMA vs. 529: Which Plan Should I Choose?

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I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

Have you been researching financial accounts and found yourself frustrated with all the money talk? This article will compare Uniform Transfer to Minors Act (UTMA) and the 529 plan and explain all you need to know.

The UTMA and 529 plans are two options for savings or investment accounts for children. Opening an investment account is an early step in providing your children or grandchildren a financial future.

Key Takeaways
  • UTMA can hold assets and property without a limit on how the beneficiary uses the funds, whereas a 529 plan only has monetary assets that you can use for education expenses.
  • A 529 plan can change beneficiaries, which can be helpful when there are multiple siblings going to college in staggering years. The UTMA account cannot change the beneficiary.
  • You will have to pay more taxes with a UTMA compared with a 529 plan. Earned and unearned income is taxable with a UTMA, whereas you do not incur federal income taxes on the distributions or earnings in a 529 plan.
  • The custodian has account ownership of and control over a UTMA until the child’s maturity (18-25, depending on the state), at which point the child can use the assets however they want. With a 529 plan, the guardian controls both the account and the investments.

What is a UTMA?

A UTMA is a brokerage account that transfers assets and property directly to the child or minor’s account. It’s a way for the guardian or custodian to save money and invest on behalf of the child until they reach maturity (the age set by the state).

Examples of assets include monetary gifts, shares, earnings, and real estate. Fidelity offers custodial accounts. The financial advisors can help you choose between a UTMA or 529 account.

The assets that go into a custodial account become the child’s property and are used for the child’s benefit. With Fidelity, you can open an account with no account fees and no minimums.

Advantages of UTMA Accounts

When it comes to deciding whether you want UTMA or 529 account, you should consider the advantages and disadvantages of each. The main advantages of a UTMA account are:

  • UTMA accounts allow the transfer of money and property to minors. Regarding investment options, you can pick and choose what you want to do.
  • Easy to open and maintain: With UTMA accounts, any adult can open and transfer assets to a UTMA account. They can then be the custodian of the account or assign someone else.
  • Can gift up to $17,000 without tax penalties: UTMA accounts do not have income limits contingent upon a $17,000 per year federal gift tax. The custodian is subject to the federal gift tax if more than $17,000 (or $34,000 if filing jointly).
  • The beneficiary can use funds for anything. UTMA allows the child to use the accounts however they want once they reach maturity. Before that, the custodian can only use the assets to benefit the child.

Disadvantages of UTMA Accounts

Although UTMA accounts have many advantages, they also have the following disadvantages:

  • Cannot change the beneficiary: The assets in UTMA accounts can only be used for the beneficiary or the named child on the account. You cannot transfer the accounts to a sibling or other family member.
  • Limited tax benefits: Earnings in a UTMA account are subject to taxes, while income from investments is unearned. Unearned income over $2,200 is taxed using the rates for estates and trusts.
  • Affects the child’s financial aid eligibility: The assets in UTMA accounts are the child’s assets, which are weighed more than guardian or parent assets on the Free Application for Federal Student Aid (FAFSA). Students are expected to use up to 20% of their assets for college, while the expectancy for guardians is up to 5.64% of assets.

What is a 529 Plan?

A 529 plan is an education savings account for children that allows earnings to be used for eligible education expenses. The plan is named after Section 529 of the IRS tax code, which states that earnings for qualified education expenses are not taxed.

Nearly every state has a 529, and most colleges accept the funds. You can typically open a 529 through financial institutions such as Fidelity and pick your investment strategy. Investments range from conservative to aggressive.

Advantages of a 529

The UTMA account has several advantages. By comparing both benefits, you can decide which plan — UTMA or 529 — is best for you.

  • High annual limits: The annual contribution limit is $300,000, depending on the state.
  • Flexible plan location: The 529 savings plan has fewer restrictions compared to other college savings plans.
  • Easy to open and maintain: Anyone can open an account. All you need is a minimal contribution. Depending on the state and plan, this could be zero.
  • No age limit for contributions or distributions: The funds do not expire and can be used for the named beneficiary.
  • Tax-deferred growth: You have tax-deferred growth on earnings.
  • Tax-free withdrawals: All qualified distributions are tax-free federal income.
  • Tax-deductible contributions: Up to $85,000, the contribution can be considered a gift and qualifies for the annual gift tax-free transfer.
  • Student loans: A portion can be used to pay student loans.

Disadvantages of a 529

With all the advantages of a 529, it’s easy to overlook the disadvantages. However, you should compare the good and the not-so-good.

  • Cannot lock in tuition costs: There is no guarantee and no lock on tuition rates.
  • Charges fees: There are enrollment, annual maintenance or asset-based expense fees.
  • Limited investment options: A few available selection options include stocks, bonds, mutual funds and money market accounts.
  • Varying fees: There are different fee levels per state.
  • Must be used for education: You will incur high fees and taxes if not used for qualified educational expenses.
  • Restriction on switching investments: You can only change your investment type twice yearly or when you change beneficiaries.

529 vs. UTMA Account: How do they compare?

529 PlanUTMA Account
Tax-deferred growthBeneficiary can use funds for anything
Flexible plan locationPortion of funds are taxed at the child’s tax rate
Must be used for educationCannot change beneficiary
Cannot lock in tuition costsAffect ability for child to receive financial aid

Which is Better: UTMA or 529?

When deciding which is better — UTMA vs. 529 — you have to consider the flexibility of the UTMA with the tax advantages of the 529.

UTMA is best if you want a variety of investments in the child’s name and you want to give them the choice of going to college. The 529 plan is best if you know that the child or one of their siblings will need help with higher education expenses, such as college tuition.

The key differences when choosing between these investment strategies winds down to investor type and experience level. How much are you willing to risk?

Choose a UTMA If:

  • You want to grant the child the freedom to use the assets how they want.
  • You want property, including real estate, in the child’s name.
  • You are unsure if the child will choose qualified higher education.

Choose a 529 Plan If:

  • Your financial goal is saving for college or other educational purposes.
  • You want the ability to change the beneficiary.
  • You want to minimize the impact on financial aid.


Let’s take a closer look at some frequently asked questions about the UTMA and 529 plans.

Can I open a UTMA account and 529?

You can open a UTMA and a 529 for the same child.

Who pays the taxes on a UTMA account?

The child owns funds in a UTMA account. Therefore, earnings are taxed at the kiddie tax or child’s tax rate.

What happens to 529 when the child turns 21?

Nothing. The guardian is the account owner, controls the account and can decide what to do.

I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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