UGMA vs. UTMA vs. 529 Plan: What’s the Best Way to Save for Your Child’s Education?

Key Points:

• UTMAs, UGMAs, and 529 Plans are three of the most common ways to save for a child’s future, each offering different rules, tax benefits, and trade-offs.
• UTMAs and UGMAs allow a wide variety of assets, are easy to set up, and give children full control at adulthood, but they can reduce financial aid eligibility and lack special education-related tax benefits.
• 529 Plans provide tax-free growth and withdrawals for qualified education expenses, allow parents to retain control, and now include the option to roll unused funds into a Roth IRA.
• Families focused on flexibility may prefer UTMAs or UGMAs, while those prioritizing tax efficiency and control for education savings are often better served with a 529 Plan.

As a Utah-based wealth management firm, one of the questions we hear most often is: “What’s the best way to set aside money for my kids?”

From the moment they arrive, children have a way of reshaping every priority, including financial ones. It’s only natural to want to give them every opportunity for success. But with choices like UTMAs, UGMAs, and 529 Plans, it can be tough to know which savings option is right for your family.

That’s why we’ve put together a breakdown of the most common education savings accounts, along with the key advantages and trade-offs of each.

What Is a UTMA (Uniform Transfers to Minors Act) Account?

A UTMA account is a custodial account, meaning an adult sets it up and manages it for the benefit of a child. You can deposit a wide range of assets into a UTMA, including:

• Cash
• Stocks, bonds, and mutual funds
• Real estate
• Intellectual property (like royalties from a book or music)

The account is legally owned by the child, but the adult custodian controls it until the child reaches the “age of majority” (18 or 21 depending on state law). Some states allow the transfer to occur as late as age 25 if this is indicated in the titling of the account.

How a UTMA Works

1. You open the account at a bank or brokerage and name yourself (or another trusted adult) as the custodian.
2. You make contributions in the child’s name. For example, you might deposit $5,000 of cash or transfer 50 shares of stock.
3. As the custodian, you decide how to invest and manage the money until your child is old enough to take over.
4. When your child reaches adulthood, the account is automatically turned over to them, and they can use the funds however they want. In other words, they don’t have to use the funds for educational purposes.

How UTMAs Are Taxed

• In 2025, the first $1,350 of unearned income (like dividends or interest) in the UTMA is tax-free.
• The next $1,350 is taxed at the child’s tax rate.
• Anything above that is taxed at the parent’s rate (“kiddie tax” rules).
• Contributions count as completed gifts for tax purposes, meaning you can give up to $19,000 per year (per parent, per child in 2025) without triggering gift taxes.

UTMA Pros

Using a UTMA to save for your child’s future comes with several potential advantages, such as:

• In addition to cash, contributions of investments and property are allowed.
• This type of account is relatively easy to open and manage.
• Funds can be used for anything your child chooses—for instance, college, a first home, or even starting a business.

UTMA Cons

UTMAs also come with drawbacks, including:

• Once your child reaches adulthood, you lose all control. They can withdraw and spend it however they like, even on things you may not agree with.
• Funds are considered the child’s asset for financial aid purposes, which can significantly reduce eligibility.
• There are no special tax advantages beyond income-shifting, even when the funds are used for educational purposes.

Who Is a UTMA Best For?

UTMAs tend to be a good fit for families who want to gift a broad range of assets, not just cash, and don’t mind the child having full control of the funds at adulthood. However, because UTMA accounts are considered the child’s asset when applying for financial aid, they can significantly reduce eligibility for need-based aid. Parents who want to maintain control of the funds or minimize the impact on financial aid may prefer a different savings option.

What Is a UGMA (Uniform Gifts to Minors Act) Account?

Like a UTMA, a UGMA is a custodial account you set up for your child. The main difference is that UGMAs are more limited, meaning they can only hold financial assets like:

• Cash
• Stocks, bonds, mutual funds, and CDs

They cannot hold property like real estate or royalties.

How a UGMA Works

1. You open the account in your child’s name with yourself (or another adult) as custodian.
2. You transfer money or investments into the account.
3. As custodian, you manage the investments until your child turns 18 or 21 (depending on state law).
4. At the age of majority, control transfers completely to your child.

How UGMAs Are Taxed

• Same as UTMAs: In 2025, the first $1,350 of unearned income (like dividends or interest) in the UGMA is tax-free.
• The next $1,350 is taxed at the child’s tax rate.
• Anything above that is taxed at the parent’s rate (“kiddie tax” rules).
• Contributions count as completed gifts for tax purposes, meaning you can give up to $19,000 per year (per parent, per child in 2025) without triggering gift taxes.

UGMA Pros

Families often turn to a UGMA because it provides advantages such as:

• UGMA accounts are simple and straightforward.
• It can give your child a financial foundation for early adulthood.
• It allows you to invest in a wide range of securities to grow over time.

UGMA Cons

Of course, UGMAs also come with potential downsides, including:

• Contributions are limited to financial assets (making these accounts less flexible than a UTMA).
• At adulthood, your child decides how to spend the money.
• UGMAs have the same impact on financial aid as UTMAs.

Who Is a UGMA Best For?

UGMAs are very similar to UTMAs but differ in two ways: the transfer age and the types of assets allowed. They tend to work well for parents who want a simple way to invest for a child’s future without needing the flexibility to hold property.

Like UTMAs, UGMA accounts count as the child’s asset for financial aid, which can reduce need-based eligibility. Families who want to keep control of funds or protect aid opportunities may prefer another savings option.

What Is a 529 College Savings Plan?

A 529 Plan is a special tax-advantaged account designed to help families save for education. The federal government allows earnings to grow tax-free, and withdrawals are also tax-free when used for “qualified education expenses.”

Qualified expenses include:

• Tuition and fees for college, trade school, or vocational school
• Room and board (if the student is enrolled at least half-time)
• Books and supplies
• Computers and internet access used for schoolwork
• Up to $10,000 per year for K–12 tuition
• Certain apprenticeship programs

How a 529 Plan Works

1. You open an account through your state’s 529 plan or another state’s plan (many states let nonresidents participate).
2. You contribute money, either regularly (like $200/month) or in lump sums.
3. You choose from the plan’s investment options, often age-based portfolios that become more conservative as college approaches.
4. The money grows tax-deferred, and qualified withdrawals are tax-free.
5. You remain the account owner and keep control, even after your child turns 18. If your child doesn’t use the money, you can change the beneficiary to another family member or roll unused funds over to a Roth IRA.

New 529-to-Roth IRA Rollover Rule

Starting in 2024, families have a new option for unused 529 funds. Thanks to the SECURE 2.0 Act, you can roll over leftover money from a 529 plan into a Roth IRA for the account’s beneficiary without taxes or penalties. This helps reduce the worry about “overfunding” a 529 if your child doesn’t use all the money for education.

Here are the key rules:

• Account age: The 529 must have been open for at least 15 years.
• Funds in account: Contributions (and their earnings) must have been in the account for at least 5 years before they’re eligible for rollover.
• Beneficiary match: The rollover must go into a Roth IRA owned by the 529’s beneficiary.
• Lifetime cap: Each beneficiary can roll over up to $35,000 total over their lifetime.
• Annual limits: Rollovers count toward the annual Roth IRA contribution limit ($7,000 in 2025 for those under age 50).
• Earned income requirement: The beneficiary must have earned income at least equal to the rollover amount.

State-Specific Details

Nearly every state sponsors its own 529 plan, each with different investment options, fees, and potential state tax benefits. You’re not limited to your home state’s plan, but it’s wise to see how it compares.

Utah’s plan, known as my529, is widely recognized as one of the top-rated 529s in the country. It offers low fees, strong investment options (including age-based and customized portfolios), and a Utah state income tax credit for contributions. In 2025, Utah taxpayers can claim a credit on contributions up to $2,490 per beneficiary for individuals ($4,980 for joint filers).

How 529 Plans Are Taxed

• Unlike UTMAs and UGMAs, earnings in a 529 Plan grow tax-free.
• Withdrawals for qualified expenses are also tax-free.
• Non-qualified withdrawals are taxed as ordinary income plus a 10% penalty on earnings.
• Contributions count toward the $19,000 federal annual gift tax exclusion (per parent, per child in 2025).
• Some families choose to “superfund” by contributing 5 years’ worth at once ($95,000 per parent, per child).

529 Plan Pros

529 Plans are one of the most popular ways to save for education, thanks to advantages like:

• Major tax benefits for education savings.
• Parent keeps control of the account regardless of child’s age.
• Beneficiary can be changed to another family member.
• Unused funds can now be rolled over to a Roth IRA if certain conditions are met. This new rule gives parents added confidence that their 529 savings won’t go to waste, even if their child takes a nontraditional education path.
• High contribution limits.
• Many states, including Utah, offer additional tax incentives.

529 Plan Cons

529 Plans also have a few potential drawbacks to keep in mind, such as:

• Funds must be used for qualified education expenses—or rolled into a Roth IRA under the new rules—or else withdrawals may be taxed and penalized.
• Investment choices are limited to those within the plan.
• Risk of overfunding if the child doesn’t pursue higher education (though new rules allow limited rollovers to a Roth IRA).

Who Is a 529 Plan Best For?

529 Plans are best for families who want to save specifically for education in a tax-efficient way and appreciate keeping control of the funds even after their child turns 18. They’re also a good fit for parents in states like Utah that offer tax incentives, and for those who value the new Roth IRA rollover option as a backup plan. Families seeking more flexibility in how the money can be used may prefer a different savings vehicle.

TrueNorth Wealth Is Here to Help

The best savings option for your child depends on your family’s goals, priorities, and comfort with the trade-offs each account presents. By learning how UTMAs, UGMAs, and 529 Plans work, you can choose the path that supports your child’s future while aligning with your overall financial strategy.

If you’re weighing your options, you don’t have to do it alone. At TrueNorth Wealth, our team of CFP® professionals can help you evaluate the differences, navigate the rules, and design a plan that’s tailored to your family’s needs.

TrueNorth Wealth is among the top Wealth Management firms in Utah and Idaho, with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, we focus on helping our clients build long-term wealth while maximizing the enjoyment they receive from their money. We do this by pairing our clients with a dedicated CFP® professional backed by an incredible team.

For our team at TrueNorth, it’s about so much more than money. It’s about serving families all across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a no-cost consultation, visit our website at TrueNorth Wealth or call (801) 316-1875.