UTMA vs 529: Key Differences in Education Savings Options

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

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

   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. 

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.

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  

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?