The major differences between an UGMA or UTMA account and a 529 college savings plan include the tax impact, the financial aid impact, account ownership and permitted uses.
This table summarizes the differences between UGMA and UTMA accounts and 529 plans.
|Characteristic||UGMA or UTMA Account||529 Plan Account|
|Ownership and Control||An UGMA or UTMA account is a child asset, controlled by a custodian until the child reaches the age of majority||A 529 plan is controlled by the account owner, who is usually the parent|
|Tax Impact||Taxes are paid on the earnings on an annual basis, with some Kiddie Tax benefits||Earnings accumulate on a tax-deferred basis and are entirely tax free if distributions are used to pay for qualified educational expenses. The earnings portion of a non-qualified distribution is taxable, plus a 10% tax penalty. Many states offer a state income tax break based on contributions to the state’s 529 plan.|
|Financial Aid Impact||Reported as a child asset on the FAFSA, reducing aid eligibility by 20% of the asset value||Usually reported as a parent asset on the FAFSA, reducing aid eligibility by up to 5.64% of the asset value|
|Change Beneficiary||No||Yes, to a member of the family of the old beneficiary|
|Investment Options||Unrestricted||To a selection of a few dozen stock and bond mutual funds, FDIC-insured investments, money market accounts and cash, including age-based or target date funds|
|Permitted Uses||Any expenses, not just educational expenses||Qualified expenses include college tuition and fees, books, supplies, equipment, computer (including peripherals, software and internet access), room and board (if enrolled at least half-time), special needs expenses, up to $10,000 per year in K-12 tuition, up to $10,000 per borrower in student loan payments (lifetime limit)|
A 529 plan is the best option if the child will go to college, while an UGMA or UTMA account provides more flexibility if the child will not be going to college.
The choice between a 529 plan and another type of investing vehicle may change when college enrollment is just a few years away.
- Risk tolerance. The percentage invested in stocks should decrease as college approaches, to reduce the risk of investment loss. When the child enters high school, no more than a third should be invested in stocks. When the child is a high school senior, only about 10% to 20% should be invested in stocks. This means that the return on investment will be much lower for a high school student, in the same ballpark as long-term certificates of deposit. So, return on investment may no longer be a distinguishing characteristic between 529 plans and UGMA or UTMA accounts.
- Lower fees vs. tax breaks. Around the time the child enters high school, state tax breaks available on in-state 529 plans matter more than having lower fees on an out-of-state 529 plan. The state income tax deductions and tax credits can function like a discount on tuition. UGMA and UTMA accounts do not offer similar tax breaks.
However, the financial aid treatment of 529 plans still provides a significant advantage, even if the difference in investment returns is much narrower.
If you’ve determined that a UGMA account is right for you, Acorns can help you open an account in under 3 minutes. Acorns Early is an investment account for children, where you can set up recurring investments (either daily, weekly, or monthly) starting as little as $5. For families with multiple children, you can add additional kids at no added cost.
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