Millennial Series Part X: Saving for College - 529s vs. UTMAs

Posted on Tue, Nov 28, 2017 ©2021 Drucker & Scaccetti

D&S Marketing_005-1.jpgPlanning for your child’s college education can be extremely stressful, especially with how much tuition seems to increase every year. We discussed several tax-saving options last week in a post. This blog post, however, will focus specifically on these popular options: 529 plans and accounts created under the Uniform Transfers to Minors Act (UTMA).


While both 529 plans and UTMA accounts offer a way to save for a child’s educational expenses, differences exist among these two options. Some of the most significant differences are discussed below.


Tax Advantages


Growth of funds inside an UTMA account are subject to income taxes. Only 529 plans allow for the contributions to grow tax-free while they remain in the plan. Withdrawals from a 529 plan are also tax-free if used for qualified expenses, discussed more fully below.


In 2017, an individual may contribute up to $14,000 to a 529 plan or an UTMA account without triggering gift tax consequences.


Additionally, some states provide tax benefits to individuals contributing to a 529 plan, but not to UTMA accounts. For example, in Pennsylvania you can deduct up to $14,000 of contributions to a 529 plan per beneficiary per year. Married couples can deduct double that amount per beneficiary per year if each spouse has at least $14,000 of income in that year. Contributions to a 529 plan are not deductible for federal income tax purposes.


Both 529 plans and UTMA accounts allow for a parent or other individual to reduce, from his or her estate, contributions made to the accounts. However, if a parent is named the custodian of an UTMA account the contributions will not reduce that parent’s estate until the minor takes possession of the account.


Restriction on Use


529 plans require the funds to be used for educational purposes. Withdrawals from a 529 plan are tax-free if the funds are paid to an eligible educational institution and used for qualified expenses, like tuition, books and even room and board if the student is enrolled at least half-time.

If the funds are withdrawn and not used for qualified expenses, they will be subject to income tax and a penalty of 10% of the earnings portion of the distribution.


UTMA accounts, on the other hand, can be distributed out right to the beneficiary upon that person reaching a certain age (in Pennsylvania that age is 21). There are no restrictions on what the UTMA beneficiary does with the money. This poses an issue if you were contributing money every year for your child’s education and they instead decide to spend the funds, for example, on a new car.




529 plans usually offer limited investment options, while UTMA accounts allow the custodian to have more control over investment choices.


Change of Plans


For a 529 plan, whoever initially made contributions to the plan is the custodian and controls the plan until all of the funds have been withdrawn. When an UTMA account is created a custodian is named; that custodian will control the assets until the beneficiary reaches a specific age.


The beneficiary of a 529 plan can be changed by the owner of the plan (usually one of the beneficiary’s parents) to another member of the beneficiary’s family without triggering income tax or penalties. Qualified family members include siblings, parents, children and grandchildren, among others. This means that if one of your children does not use all the funds in his or her 529 plan, or chooses not to go to college, the funds can be transferred to a different child that could use the funds for educational purposes.


Conversely, neither the custodian nor the person funding the UTMA account can change the beneficiary/owner of the account once the UTMA account is created.


There are many other pros and cons of 529 plans and UTMA accounts. If you are interested in planning for your child or a loved one’s higher education, the Tax Warriors at Drucker & Scaccetti can help! Use the information in this and last week’s post to start a conversation with one of our advisors.

Topics: Contributions, Gift Tax, UTMA, 529 Plans, education, qualified expenses

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