UTMA vs Coverdell: Understanding Their Key Differences

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

Key Takeaways

  • With tax-free withdrawals for qualified education expenses, a Coverdell ESA can be a strategic choice for education-focused savings.
  • For families seeking broader flexibility, a UTMA account allows spending on any child-related expense, not just education.
  • Coverdell ESAs have strict age and income limits, with contributions ending at age 18 and usage required by age 30.
  • UTMA accounts can support a wider range of child-related expenses beyond school while Coverdell ESAs are best suited for education-focused savings.
  • Choosing between UTMA and Coverdell accounts depends on your income, education goals, and whether flexibility or tax efficiency is a higher priority.

Saving for education isn’t a one-size-fits-all solution. If you’re weighing your options, two common college savings plans may have come across your mind: UTMA account and the Coverdell Education Savings Account. But what makes them different, and how might each one fit into your college planning equation?

In this guide, we'll explore how these two types of savings accounts work, the rules that come with them, and how they could fit into your broader education goals.

UTMA vs Coverdell: Side-by-Side Comparison

Individual suitability depends on personal circumstances, and each option has specific considerations.

 Feature   UTMA   Coverdell ESA 
 Control Transfers At   Age 18 or 21  Age 30
 Annual Contribution Limit   No specific limit   $2,000 per beneficiary 
 Income Restrictions  None  Yes (MAGI-based)
 Eligible Expenses  Broad  Qualified education expenses 
 Tax Advantages  Investment income taxed under kiddie tax (unearned income exceeding $2,700 is taxed under parents' rate)   Tax-free withdrawals if used properly 
 Asset Ownership  Child (irrevocable)  Child
 Flexibility  High  Moderate

What Is a UTMA Account?

Basic Overview & Purpose

A UTMA (Uniform Transfers to Minors Act) account is a type of custodial account designed to hold and protect assets for a minor until they reach the age of majority (typically 18 or 21, depending on the state). It's one of the many types of accounts that can be used for college savings, although it isn't limited to that purpose.

How It Works

The account is managed by a custodian, often a parent or guardian, until the child (the beneficiary) comes of age. At that point, the child gains control of the assets. The money can be used for any expense that benefits the child, whether that’s college tuition, a car, or another purpose.

Tax Treatment

UTMA accounts generate investment income, which is subject to federal income tax under the "kiddie tax" rules. This means a portion of the income may be taxed at the parent's rate if it exceeds a certain amount. Contributions count toward the annual gift exclusion, and large gifts may trigger federal gift tax considerations.

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

Annual Gift Tax Exclusion

Contributions are subject to the federal annual gift tax exclusion, which for 2025 is $19,000 per donor, per recipient.1
$19,000

Contribution Flexibility

There are no formal contribution limits for UTMA accounts, which can be helpful for families who want to gift more. However, all contributions are considered irrevocable gifts and become the child’s property once deposited. The assets cannot be taken back or redirected to another beneficiary.

UTMA Pros & Cons

Pros   Cons 
 Flexible use for various child-related needs, outside college expenses   Earning subject to kiddie tax rules (unearned income exceeding $2,700 is taxed at parents' rate) 
 No formal contribution limit  Considered child asset, may impact financial aid 
 Simple set up process  Assets become irrevocable property of the child at age of majority 

What Is a Coverdell ESA?

Basic Overview & Purpose

Coverdell Education Savings Accounts are tax-advantaged accounts designed to help pay for K-12 tuition and college education. They fall under the umbrella of tax-deferred accounts that offer unique benefits for educational planning.

How It Works

Funds from a Coverdell ESA can be used for expenses from kindergarten through college. This includes tuition, supplies, and some room-and-board costs. Contributions can be made until the beneficiary turns 18, and the money must generally be used by age 30 unless it’s rolled over to another eligible family member.

Tax Benefits

Withdrawals from a Coverdell ESA are tax-free at the federal level as long as they are used for qualified education expenses and comply with IRS rules. If the money is used for non-qualified purposes, it becomes subject to income taxes and may incur an additional 10% penalty.

Contribution Limits

Each beneficiary can receive up to $2,000 per year in contributions across all their Coverdell accounts. There are also income limits for contributors.

  • For single filers, the phase-out range begins at $95,000 and ends at $110,000.
  • For married couples filing jointly, it begins at $190,000 and ends at $220,000.1
  • Income in excess of these limits generally disqualifies contributors.

Coverdell Pros & Cons

 Pros   Cons 
 Tax-free growth and withdrawals on education   Annual Contribution limit at $2,000 
 Covers K-12, college, special needs beneficiary expenses   Income limitations exclude some contributors 
 Allows account control until beneficiary turns 30  Funds generally must be used by age 30

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

Additional Considerations for College Planning

Impact on College Costs & Financial Aid

UTMA accounts are considered the child’s asset and because they often generate unearned income, they can weigh more heavily in financial aid calculations compared to parental assets. Coverdell ESAs, though also listed under the child’s name, may be treated more favorably depending on how they are reported.

Age Limit

Coverdell ESAs have specific age restrictions worth keeping in mind. Contributions can only be made for a beneficiary until they turn 18, unless they qualify as a special needs individual. In addition, the funds in the account must generally be used by the time the beneficiary turns 30.2 If not used by that age, the remaining balance may become subject to taxes and penalties unless rolled over to another eligible family member.

Coverdell ESA funds must be used by age 30 to avoid taxes and penalties.

Full-Time College Students & College Loans

Funds from both UTMA and Coverdell accounts can be used to support full-time college students. However, because UTMA accounts aren’t limited to education, families may use those assets toward other financial needs, potentially reducing reliance on college loans.

Rollover Contributions

Coverdell ESAs allow rollover contributions to other eligible family members under age 30 without tax consequences. UTMA accounts do not permit rollovers. Once the assets are designated for one child, they generally must remain with that beneficiary.

How to Open & Manage These Accounts

Opening a UTMA Account

To open a UTMA account, you can visit a bank, credit union, or brokerage firm that offers custodial accounts. You'll need to provide the child's legal information, such as their Social Security number, and designate a custodian who will manage the account until the child reaches the age of majority. After the account is open, contributions can be made directly and invested in options like mutual funds, stocks, or savings accounts, depending on the provider.

Opening a Coverdell ESA

To open a Coverdell Education Savings Account, start by choosing a financial institution or investment firm that offers ESAs. You’ll need to complete an application with the beneficiary’s and contributor’s information and verify that the contributor meets the income eligibility requirements. Once the account is established, you can contribute up to $2,000 per year per beneficiary and choose investments aligned with your savings timeline and risk tolerance.

UTMA accounts can be opened at most banks or brokerage firms. The process typically involves naming a custodian, providing the beneficiary’s details, and selecting investment options. Contributions count as annual gifts, and the custodian manages the assets until the child reaches adulthood.

Coverdell ESAs are also available through financial institutions. You’ll need to verify your income eligibility and ensure contributions do not exceed the annual cap. Like UTMA accounts, you can choose how to invest the funds based on your goals and risk tolerance.

Final Thoughts

Whether you’re looking to save for K-12 tuition, college on campus, grandparents contributions, or anything in between, understanding the differences between UTMA vs Coverdell accounts can help clarify your choices for college saving. Each option offers unique tax advantages, contribution limits, and control structures. Before making any decisions, you may want to consider your family’s income level, education goals, and how each account fits into your broader investment strategy.

Consider speaking with a financial professional to explore investment options and see how each may align with your goals.

    Choose the right investing strategy for your college savings goals. Invest In My Child  

Frequently Asked Questions

Can you have both a UTMA and a Coverdell for the same child?

Yes, it’s possible to have both a UTMA account and a Coverdell Education Savings Account for the same beneficiary. Each offers different advantages. UTMAs allow flexible use of assets while Coverdell ESAs provide tax-free withdrawals for qualified education expenses like K-12 tuition and college costs. Tax treatment depends on IRS rules and individual circumstances. Consult your tax advisor.

Which is better UTMA or UGMA?

Both UTMA and UGMA accounts are education savings options for a minors, but UTMA allows a broader range of assets like real estate and patents. The better option depends on your state laws and whether you want flexibility in asset types or are focused on traditional investments like stocks and bonds.

Can a Coverdell be rolled into a Roth IRA?

No, Coverdell Education Savings Accounts cannot be rolled over into a Roth IRA. Since Coverdell ESAs are tax-advantaged accounts for education and Roth IRAs are retirement accounts, IRS rules prohibit direct rollovers between the two account types.

Can a UTMA be rolled over into a Roth IRA? 

No, UTMA accounts cannot be directly rolled over into a Roth IRA because they are custodial accounts for minors, not retirement accounts. However, once the child reaches the age of majority and has earned income, they may choose to contribute UTMA assets into a Roth IRA, subject to IRS contribution limits.

Do withdrawals from a UTMA count toward your marginal tax rate or get taxed at ordinary rates?

UTMA withdrawals themselves aren't taxed, but any unearned income generated within the account—such as dividends or capital gains—is typically taxed at the child's rate up to a certain threshold and then at the parent's marginal tax rate under the kiddie tax rules. This income is generally taxed at ordinary rates, depending on the type of earnings and the child's total taxable income.

Sources

  1. Equity Trust. "2024 & 2025 IRA, HSA, CESA, and Solo 401(k) Plan Contribution Limits." https://www.trustetc.com/sdira-resources/contribution-limits/
  2. Internal Revenue Service. "Topic no. 310, Coverdell education savings accounts." https://www.irs.gov/taxtopics/tc310
  3. Fidelity. "What to know about the kiddie tax." https://www.fidelity.com/learning-center/personal-finance/kiddie-tax
  4. Fabric by Gerber. UGMA investment accounts for kids. https://meetfabric.com/ugma-investment-account-for-kids?

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