UTMA vs 529: Key Differences in Education Savings Options

Reviewed by W&S Financial Review Board
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The key differences between a UTMA account and a 529 Plan.The key differences between a UTMA account and a 529 Plan.

Key Takeaways

  • Families looking for flexibility in how funds are used may benefit from a UTMA, which supports a broader range of expenses beyond education.
  • With tax-free earnings and control retained by the custodian, a 529 plan is tailored specifically for education-related savings.
  • There are no formal contribution limits on UTMA accounts, though large gifts may still trigger gift tax considerations.
  • For those prioritizing tax benefits and financial aid compatibility, 529 plans may offer certain tax advantages depending on your goals.
  • Using both a UTMA and a 529 account could be a practical solution for parents balancing short-term flexibility with long-term college planning.

Choosing between a UTMA and a 529 plan can be overwhelming. Each account type serves different goals, from broad expense flexibility to education-specific savings. Here’s what to know before you decide.

What Is a UTMA Account?

A UTMA (Uniform Transfers to Minors Act) account is a custodial account where a parent,  guardian, or any other custodian manages assets for a minor. The assets are irrevocably gifted to the child but stay under the custodian's control until the child reaches the age of majority (18 or 21).

Unlike education-specific accounts, UTMA assets can be used for any expense that benefits the child, from extracurriculars to transportation. They also allow for flexible investments, including mutual funds, stocks, and bonds.

However, tax rules apply. Part of the earnings may be taxed at the child’s rate, but unearned income over a certain threshold is subject to the “kiddie tax.”

In 2025, a child's unearned income is taxed as follows:

  • First $1,350: tax-free
  • Next $1,350: child's tax rate
  • Over $2,700: parents' tax rate3

Pros & Cons of UTMA Accounts

 Pros  Cons
 Flexible usage beyond education   Considered child's asset, may impact financial aid more 
 Broad account options  Control transfers to child at majority age
 No specific contribution limits  Less favorable tax treatment

What Is a 529 Plan?

A 529 plan is a tax-advantaged account designed to encourage saving specifically for college tuition and other qualified college expenses. Additionally, funds in a 529 grow through tax-deferred growth, and tax-free earnings apply when used for qualified expenses such as college tuition, K-12 or college costs, student loans, and prepaid tuition plans. However, non-qualified withdrawals may be subject to taxes and penalties.

Pros & Cons of 529 Plans

 Pros  Cons
 Tax-deferred growth & tax free withdrawals for qualified expenses   Limited to qualified educational expenses 
 Favorable treatment for financial aid  Penalties for non-qualified withdrawals
 Custodian retains control of assets  Restricted account options depending on the plan 

   Get ahead of planning for college expenses. Estimate College Savings Needs  

What is the Impact on Financial Aid Eligibility?

The financial aid impact of UTMA accounts and 529 plans varies significantly due to how each is treated in the FAFSA (Free Application for Federal Student Aid) formula.

Since UTMA accounts are student assets, financial aid eligibility is generally reduced by about 20% to 25% of the account value each year.2 For example, if a student has a $10,000 UTMA account, financial aid eligibility could be reduced by roughly $2,000 to $2,500 per year.

As a parental asset, 529 plans typically reduce financial aid eligibility by a significantly smaller percentage. This is usually around 5.64% of the account's value each year. For example,  a $10,000 balance in a parent-owned 529 could reduce financial aid by roughly $564 per year.

Are There Any Limits on Contribution Amounts?

Contribution limits are another key factor when evaluating UTMA and 529 plans.

For 529 plans, contributions are subject to state-determined aggregate limits that can exceed $300,000 in many states.1 While there’s no annual federal contribution limit, contributions above the annual gift tax exclusion may require filing a gift tax return. 

2025 Annual Gift Tax Exclusion

The annual contribution limit is $19,000 per recipient, per donor. Individuals who contribute more than that amount must file a gift tax return form.3
$19,000

In contrast, UTMA accounts don’t have specific contribution limits. However, contributions are irrevocable gifts and may be subject to the same gift tax rules mentioned above. Additionally, since the assets become the child’s property, large contributions could have tax and financial aid implications down the road.

What Are My Account Options?

529 plans generally offer convenience and structure, but their investment menus are limited to options provided by each state’s plan. These often include age-based or target-date funds. While suitable for many families, these choices may feel restrictive if you want more personalized control over how your money is invested.

In contrast, UTMA accounts allow access to a wide range of assets, similar to a regular brokerage account. That includes mutual funds, stocks, and certificates of deposit (CDs). This broad access lets you tailor the account to your specific investment preferences and risk tolerance. If you’re interested in building a diversified portfolio that extends beyond educational needs, a UTMA may offer greater appeal.

What Happens to Unused 529 & UTMA Money if College Plans Change?

Not every student follows a straight path from high school to college, and plans can change. If your child delays or skips college enrollment, 529 plans may become less practical. However, recent rules allow for more flexibility, such as rolling unused 529 balances into a Roth IRA (subject to limits) or reallocating to another beneficiary. Rollovers to a Roth IRA can only happen if the account has been open for 15 years. 

If your child later becomes a borrower in student loan debt, 529 funds can now be used to repay up to $10,000 in qualifying loans.4 UTMAs, while not intended for college savings specifically, can act as a rainy day fund if educational plans change.

Using 529 Funds for Student Loans

529 funds can be used toward paying off student loan debt, but there is a lifetime limit of $10,000.
$10,000

Final Thoughts

Both UTMA and 529 accounts offer ways to save for your child’s future and may help provide assistance for college. The major difference lies in flexibility and tax treatment. Think about your priorities: Do you need a college savings tool focused on education only, or something with broader use? If you have college in mind, a 529 may align more closely with your plan for college savings. If you want to keep your options open, UTMA accounts may be worth a closer look.

You may want to consider speaking with a financial advisor or tax professional to explore how each option fits your broader financial goals.

   Get ahead of college savings with account options. Invest In My Child  

Frequently Asked Questions

At what age does a UTMA account terminate?

At the age of 18 or 21, a UTMA account typically transfers to the child, legally making them the account owner. At this point, the custodian no longer has control, and the account officially becomes a child asset, which may influence the beneficiary’s financial aid benefits when college approaches.

How do you open a UTMA or 529 Plan?

Opening a UTMA or 529 plan involves selecting a financial institution such as a bank, brokerage, or your state’s official provider. For UTMA accounts, you'll designate a custodian and specify asset types, while a 529 plan typically requires selecting a beneficiary and investment portfolio. Both options generally allow ongoing contributions and easy account management online.

Can you move money from UTMA to a Roth IRA?

Once the account is in the child’s name and they have earned income, they may choose to contribute their UTMA funds to a Roth IRA on their own. This could become a personal financial choice if they’re planning long-term savings, though it would no longer be earmarked as a tax-advantaged account or used for educational funds.

Can a parent take money out of a UTMA?

A parent acting as custodian can withdraw money from a UTMA account only if it is used for expenses that directly benefit the child. The funds cannot be used for the parent’s own purposes. This restriction ensures that the UTMA maintains its legal structure and potential tax breaks, but it may limit the account’s flexibility compared to other college savings plan accounts that remain a parent asset.

Sources

  1. Research.com (2025). "10 Rules for Superfunding a 529 Plan for 2025." https://research.com/student-loans/rules-for-superfunding-a-529-plan
  2. College Data.com. "FAFSA Assets" https://www.collegedata.com/resources/pay-your-way/how-student-and-parent-assets-affect-your-financial-aid
  3. Internal Revenue Service. "Gifts & Inheritances 1." https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances-1
  4. Saving for College (2025). "529 Qualified Expenses: What Can You Use 529 Money For?" https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan
  5. Fabric by Gerber. UGMA investment accounts for kids. https://meetfabric.com/ugma-investment-account-for-kids?

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