UTMA and UGMA Accounts vs. 529 Plan: Which is Best?
Have you been researching ways to save for your child’s future education needs? If so, you’re not alone. A recent survey found that 78 percent of parents are saving for their children’s college 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.
What is an 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.
A parent, grandparent, or another adult who opens the account is the custodian. They contribute assets and manage the account until the child (the beneficiary) reaches the age of maturity. In North Carolina, the age limit is 18 to 21. At this point, the beneficiary can do anything they want with the account, which means they can use the money to finish college or take a trip around the world. The assets are now in their control.
You can open an account through financial institutions, including banks, brokerage houses, or credit unions. Contributions are usually in the form of cash, stocks, bonds, and mutual funds.
When it comes to taxes, even though the child does not manage the account, they’re still considered the owner, so the account is generally taxed at the child’s tax rate rather than the custodian’s (presumably higher) tax rate. However, excess income is taxed at the custodian’s rate. Consult your financial advisor to discuss your options.
What is an 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. Property can include real estate, intellectual property, precious metals, art, and more.
What is a 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 eligible education expenses. These include K–12 tuition, college expenses, apprenticeship programs, student loan payments, and more.
Nearly every state has a 529 plan option. In North Carolina, we have the NC 529 Plan. 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.
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.
If the child decides not to attend college or receives a scholarship, the money can be used to pay education expenses for another child or family member. Withdrawals for non-qualified expenses are allowed. However, the earnings will be subject to a penalty as well as state and federal taxes.
Do the Accounts Affect 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 percent of the account is expected to be used for the child’s education.
For the 529 plan, if the parent of the dependent student owns the plan, it will generally have a minimal impact on financial aid.
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. If you would like more information about the NC 529 Plan, check out our FAQ page with answers to common questions about saving with NC 529.