529 or UGMA – which is better for college savings?

by Grace

Both 529 education savings accounts and UGMA (Uniform Gifts to Minors Act)/UTMA (Uniform Transfers to Minors Act) accounts can be used to pay for college, but for most families 529 plans are the better choice.

Advantages of 529 accounts
529 accounts allow parents to retain control over the funds, even after the beneficiary reaches age of majority (18 in most states).  Another benefit is that 529 earnings are always tax-free if used for approved education expenses.  For families that might qualify for financial aid, 529 assets are usually considered parent assets, which are treated more favorably than child assets in the calculation to determine financial need.  In contrast, UGMA/UTMA assets are owned by the child.

In some cases UGMA/UTMA accounts may be a better choice as a savings vehicle.  This might be true if the funds are planned for purposes other than education, such as for purchasing a house or car.  If 529 funds are not used for education, a 10% federal penalty is imposed on earnings in addition to regular taxation.

Converting an UGMA/UTMA to a 529
Since only cash within an UGMA/UTMA can be converted to a 529 account, any securities held must be sold before the conversion can be made.  If such a sale generates income, it could have a negative effect on qualifying for financial aid if it occurs too close to the student’s high school graduation date.  This is because any income reported during the period starting in January of a child’s junior year of high school and ending in December of his senior year is used in calculating financial need.  Therefore, it is usually advisable to complete any conversion from an UGMA/UTMA to a 529 before that time.  More details on the conversion process are included in this CBS MoneyWatch article by Ray Martin.


Fidelity has more information on the differences between 529 and UGMA/UTMA accounts.

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