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If you're thinking about setting money aside for a child's future, you may be comparing two popular options: UGMA accounts and 529 plans. Both offer ways to invest for a child's benefit, but they work quite differently. Knowing the key differences could help you decide which one aligns more closely with your goals. Whether you're considering flexibility, potential tax benefits, or how the account may affect financial aid, it’s worth exploring what each path has to offer.
What is a UGMA Account & a 529 Plan?
A UGMA (Uniform Gifts to Minors Act) account is a custodial investment account that allows adults to transfer assets to a minor. The child typically gains full control of the account at the age of majority.
Since UGMA assets are often invested in financial markets, their value may fluctuate and potentially decline depending on market conditions.
A 529 plan is a state-run education savings plan designed to help families save for future qualified education expenses. Some 529 plans may also be structured as a prepaid tuition plan, which allows you to lock in tuition rates at certain schools.
Get ahead of planning for college tuition. Estimate college savings needs.
What UGMA Accounts & 529 Plans Have in Common
UGMA (Uniform Gifts to Minors Act) accounts and 529 plans are both investment options for parents, relatives, friends to save for a child's future education goals. They can be set up to support long-term goals and provide structure around how funds are transferred and used. Both options let you start saving early, with the potential for tax-deferred growth depending on the account type. But once you move beyond the basics, their paths quickly diverge.
Understanding These Key Differences
Quick Comparison: UGMA Account vs. 529 Plan
If you’re trying to decide between the two, here’s a quick comparison of how UGMA accounts and 529 plans typically differ.
| Feature | UGMA Account | 529 Plan |
| Usage | Broad use for child's benefit | Limited to qualified education expenses |
| Control | Transfers to child at age of majority | Account owner typically retains control |
| Taxation | Kiddie tax rules | Tax-Deferred; Qualified Withdrawals |
| Financial Aid Impact | Greater impact on aid | Smaller impact on aid |
| Contribution Limits | No formal cap | Gift tax rules; lifetime state limits apply |
| Flexibility | High | Low |
Now that you’ve seen a side-by-side comparison, it’s worth digging deeper into what each feature could mean in real-world terms.
Usage
UGMA Account: These custodial accounts allow you to use the money for nearly anything that benefits the child such as school expenses, a first car, or even a future wedding.
529 Plan: A 529 plan typically restricts usage to qualified education expenses. You might use 529 plan funds for K-12 tuition, apprenticeship programs, or limited student loan payments, all of which are considered qualified expenses under federal law.
Control
UGMA Account: Control of the account generally shifts to the child at the age of majority, typically 18 or 21, depending on the state. After that point, the beneficiary can use the money however they wish. This transfer is permanent, and parents lose control, which may lead to choices that don't align with the original intent. It's worth considering whether you're comfortable with that tradeoff.
529 Plan: You (the parent) generally remain in control of the account throughout its life, even after your child becomes an adult, as long as funds are used for qualified expenses. Account owners can also change the beneficiary to another eligible family member, like a sibling or grandchild, without tax penalties. This control structure may help offer a sense of peace to families planning for college expenses or other educational expenses down the road.
Financial Aid Impact
UGMA Account: Considered a child asset, a UGMA account can significantly impact financial aid eligibility. These factors may be especially important for a dependent student, whose aid calculation heavily weighs certain types of assets like traditional assets or custodial accounts.
529 Plan: Typically counted as a parental asset if the parent is the account owner, a 529 plan may have a smaller effect on financial aid benefits.
Taxation
UGMA Account: Earnings may be taxed under the kiddie tax rules, meaning unearned income could be taxed at the parent’s rate if it exceeds certain thresholds.1
| Unearned Income (2025) | Tax Treatment |
| First $1,350 | Tax-free (standard deduction) |
| Next $1,350 | Taxed at child's rate |
| Over $2,700 | Taxed at parent's marginal rate |
529 Plan: These plans may offer potential tax advantages. As an incentive, over 30 states offer income tax deductions for residents who invest in their own 529 plan. Additionally, earnings grow tax-deferred, and withdrawals are generally tax-free when used for qualified education expenses.
Contribution Limits
UGMA Account: Generally, no formal contribution limit, although large gifts may require tax reporting. In 2025, any contribution above $19,000 per year per donor may require filing a gift tax return with the IRS. Even though there is not a cap, tracking total contributions, especially if there are multiple donors, could help avoid tax issues.
529 Plan: Contributions are usually subject to the annual gift tax exclusion. A special election allows you to front-load up to five years of contributions without triggering the gift tax (up to $95,000 for single filers and $190,000 for married couples in 2025).2 Understanding how the IRS treats contributions to a 529 plan can be a major difference for those managing limited assets or looking for tax breaks.
Many states also impose lifetime contribution caps for 529 plans, typically ranging from $235,000 to $621,000 (current values in 2025).3
2025 Annual Gift Tax Exclusion
Flexibility
UGMA Account: Offers high flexibility in spending, with no restrictions on how the money is used, as long as it benefits the child. Parents often use UGMA funds for enrichment opportunities, technology, or transitional life stages like moving out or starting a job. As the child matures, involving them in decisions about the account may help them develop financial responsibility before gaining full legal control.
529 Plan: Generally more restrictive, but potentially more rewarding if used for qualified education expenses. Non-qualified withdrawals generally face a 10% penalty and taxes on earnings.5 A recent rule allows limited rollovers to a Roth IRA if the 529 has been open for 15 years, with a $35,000 lifetime cap and other restrictions.6
Pros & Cons of UGMA Accounts & 529 Plans
UGMA Account
| Pros | Cons |
| Unlimited Flexibility: Use for any purpose benefiting the child. | Loss of Control: Child gets full control at age of majority. |
| Unlimited Investment Options: Stocks, bonds, etc. | Negative Financial Aid Impact: Assessed heavily as a student asset. |
| No Penalties for Use: Child can use funds for a car, travel, etc., freely. | "Kiddie Tax": Earnings are subject to taxes annually. |
529 Plan
| Pros | Cons |
| Maintained Parental Control: Owner controls funds indefinitely. | Limited Use: Penalties if used for non-qualified expenses. |
| Minimal Financial Aid Impact: Assessed at a lower parental rate. | Limited Investment Choices: Typically offers a curated menu of funds. |
| Beneficiary Changes: Can transfer funds to another family member. | Contribution Limits: Subject to annual and lifetime caps. |
Which Option Might Align Better With Your Goals?
If You Want Flexibility
A UGMA account may suit you if you're not sure your child will pursue higher education. It allows for spending on a wide range of needs, such as a first apartment, an international trip, or starting a business. That flexibility may come at the cost of fewer tax savings and a future loss of control.
If Education Is the Priority
A 529 plan may offer more appeal for college-bound students. With tax-deferred growth and potential state income tax deductions, a 529 plan can be a more cost-effective way to cover tuition, fees, books, and housing. Additionally, the Secure Act 2.0 allows for pre-college withdrawals for K–12 education or to repay a limited amount of student loans.
Final Thoughts
A UGMA may offer flexibility, while a 529 plan could provide stronger tax benefits if education is the goal. You may want to consider your child’s future path, your comfort with turning over financial control, and your desire for tax advantages or financial aid optimization. Whichever you choose, it’s worth revisiting your strategy. It may evolve as your child’s needs and future plans take shape.
Consider speaking with a financial professional who can help you understand which path is right for you.
Choose the college savings plan that works best for your college savings goals. Invest in My Child
Sources
- HR Block. "Understanding the kiddie tax: When do you pay tax on your child’s unearned income?" https://www.hrblock.com/tax-center/income/other-income/child-unearned-income/
- Fidelity (2025). "529 contribution limits for 2024 and 2025." https://www.fidelity.com/learning-center/smart-money/529-contribution-limits
- Saving for College (2025). "529 Contribution Limits 2025: Maximums by State, Gift Tax Exclusion, and More." https://www.savingforcollege.com/article/maximum-529-plan-contribution-limits-by-state
- Internal Revenue Service (2025). "Gifts & Inheritances" https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances-1
- College Invest (2025). "529 Plan Withdrawal Rules: 5 Steps to a Tax-Free Disbursement." https://www.collegeinvest.org/blog/529-plan-withdrawal-rules-5-steps-to-a-tax-free-disbursement/
- Fidelity (2025) "How unused 529 assets can help with retirement planning." https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth
- Fabric by Gerber Life. UGMA investment accounts for kids. https://meetfabric.com/ugma-investment-account-for-kids?utm_source=wsfg&utm_medium=site&utm_campaign=ugma&utm_content=ugma-account
