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