UTMA vs. UGMA vs. 529 Plan: Understanding the Differences
Have you been researching ways to save for your child’s future education needs? If so, you’re not alone. Education Data Initiative found that 64% of parents are either saving, planning, or both for their child’s college. The same research shows parents are trying to save about $55,000 on average for their child’s future college and education.
During your research, you’ve probably stumbled across various types of accounts, including the UTMA, UGMA, and 529 accounts. Each type of account has benefits that may work for your family’s financial situation. Here’s how they compare, so you can choose the best one for your family.
UGMA vs. UTMA vs. Individual 529 Account
While all three accounts are savings accounts for children, there are some stark differences between them. Let’s start with a simple definition of each:
- UGMA Account: UGMA stands for the Uniform Gift to Minors Act. The account can be used to pay for anything that benefits the child, including, but not limited to, their education.
- UTMA Account: UTMA stands for the Uniform Transfer to Minors Act. It’s similar to the UGMA account but also allows the transfer of property to the minor’s UGMA account.
- 529 Account: A 529 account is a tax-advantaged education savings account. This type of account is named after Section 529 of the Internal Revenue Service tax code, which allows account earnings to avoid being taxed if they’re used for qualified education expenses. These include K–12 tuition, college expenses, apprenticeship programs, student loan payments, and more.
Now that you have a basic understanding of the differences between UGMA vs. UTMA vs. individual 529 accounts, let’s compare them in a little more detail. Check out the tax advantages and other savings benefits of all three in the chart below:
| NC 529 | UGMA | UTMA | |
| Tax | No state or federal tax on earnings when used for qualified education expenses for the lifetime of the account | Usually taxed at the child's tax rate, but excess income is taxed at the custodian’s rate | Gifts are tax-free until the beneficiary is 18 |
| Uses | K-12 tuition, college expenses, apprenticeships, and other trade programs | Can be used for anything, including education, once the beneficiary is 18 | Can be used for anything, including education, once the beneficiary is 18 |
| Composure | Stocks, bonds, mutual funds | Cash, stocks, bonds, and mutual funds | Stocks, bonds, mutual funds, and various forms of property |
| Financial Aid Impact | Accounts owned by grandparents or a third party will not impact eligibility for financial aid. A max of 5.64% of the asset can impact financial aid eligibility for accounts owned by the beneficiary or parents | Can impact eligibility for need-based financial aid by up to 25% of the asset value | Can impact eligibility for need-based financial aid by up to 25% of the asset value |
UTMA vs. 529
Let’s compare a UTMA vs. a 529 Account. It is important to do your own research and talk with a financial advisor to understand the best option for you based on your financial goals, needs, and situation.
In a UTMA account, there can be stocks, bonds, mutual funds, and property. Property can include real estate, intellectual property, precious metals, art, and more. A UTMA account will be held for a minor until they are 18 or older as a custodial account. The beneficiary can receive gifts without state tax penalty until they are 18. This money can be used for anything once the beneficiary reaches adulthood.
Nearly every state has a 529 plan option. In North Carolina, we have the NC 529 Plan. A 529 account is a tax-advantaged education savings account. Funds can be used tax-free for eligible education expenses.
You can open and manage your account on the website. Even though it’s a state-based plan, the funds can be used at nearly any college nationwide — and some internationally. Investment options include a range of strategies, from conservative to aggressive, depending on what meets your savings needs.
When comparing UTMA vs. 529 accounts, it’s good to note who controls the accounts. Depending on your situation, it may be a benefit that the beneficiary would not control an account. The person who opens a 529 account (usually the parent) controls the account. Even when the child becomes a legal adult, the parent will control the funds. Anyone, including grandparents, other family members, and friends, can make contributions to the child’s education as gifts on birthdays or special holidays.
Do the Accounts Affect Financial Aid?
Another important note to make when comparing a UGMA or UTMA vs. 529 account is the impact on financial aid. The UTMA/UGMA accounts are considered assets of the child and taken into consideration for the Free Application for Federal Student Aid (FAFSA). About 20% of the account is expected to be used for the child’s education.
For the NC 529 Plan, if the parent of the dependent student owns the plan, it will generally have a minimal impact on financial aid. This is a big pro of the account. Compare other pros and cons of 529 plans here.
Choosing the Right Plan for Your Family
There are many good savings options that families can choose from to plan for their children’s futures. The exciting news is that you’re planning for your child’s future! Discuss your financial needs and options with your financial advisor and compare UTMA vs. 529 account options with them. If you are ready to embrace the tax savings of a 529 account, open an NC 529 Account today.