UGMA vs. UTMA: Which College Savings Account Is Best for You?

If you’re looking for an alternative college-saving route, you might want to look into these types of custodial accounts.

Written by Dori Zinn / October 10, 2022

Quick Bites

  • UTMA and UGMA accounts are both custodial accounts for minors.
  • Funds can be used for more than college-related expenses, like saving for a home, car or another major expense.
  • While 529 college savings plans have big tax breaks, custodial accounts don’t. They can also hurt your chances of qualifying for federal financial aid.

As you’re working through different college-saving options, a 529 plan is one of the most popular. But there are other plans you might want to explore: UGMA and UTMA accounts.

Both of these savings vehicles have different spending requirements and tax implications compared to 529 plans.

Inside this article

  1. What is a UGMA?
  2. What is a UTMA?
  3. UGMA vs. UTMA at a glance
  4. Pros and cons of UGMAs, UTMAs

What is a UGMA?

A Uniform Gifts to Minors Act, or UGMA, is a type of custodial account that an adult can set up for a minor. UGMA was set up for children who come from families with limited assets. While some families are able to pass along assets, like a home, to their children, UGMA accounts let parents pass along cash through investments, like stocks, insurance policies and cash.

What is a UTMA?

A Uniform Transfers to Minors Act, or UTMA, is another type of custodial account that a parent or another adult can set up for a minor. You don’t need to be a parent or guardian to set one up for a minor.

UTMA accounts can include other types of assets alongside traditional investments. If a parent wants to leave an expensive china collection or piece of art to their child, they can place it in a UTMA account.

UGMA vs. UTMA at a glance

Both UGMA and UTMA are very similar and in some cases, are referred to interchangeably.[1]

  • They’re custodial accounts that hold financial assets for a minor until they come of age to hold it on their own

  • They’re taxable brokerage accounts and don’t have contribution limits

  • They’re not strictly for educational purposes like 529 plans are, but you can use the money for college

The major difference is what’s inside the accounts.

“An UGMA is the traditional type of custodial account,” says Natalia M. Zimnoch, a registered investment advisor with LifeMark Securities. “It can hold financial assets like cash, stocks, bonds, mutual funds, index funds and insurance policies. UTMA accounts can hold all of [that] but can also hold physical assets like fine art, real estate and other non-traditional valuables.”

Keep in mind that not every state offers UTMA accounts; every state does offer UGMA accounts.

UGMA, UTMA 529 savings plan
EligibilityCannot withdraw funds until of legal age based on where you live (between 18 and 25) Anyone can open for another person, regardless of age, to use for educational purposes (K-12, college, trade schools, etc.)
RulesMoney must be used to benefit the child: education, well-being, or something else Funds must be used for qualified educational expenses, like tuition, room and board, supplies and equipment
TaxesTaxable investment account; must pay capital gains tax For most accounts, it’s tax-free contributions, earnings and eligible withdrawals
ContributionsNo limitDepends on the type of account and the state it’s opened in
WithdrawalsBy the account custodian until the child comes of age, who then can make their own withdrawals Parents can take money out of a 529 plan and transfer either to themselves, the student beneficiary or make payments directly to the financial institution
Investments included Cash, stocks, bonds, mutual and index funds, options and insurance policies (for UGMA); and real estate, collectibles other valuables (UTMA) Mutual funds, exchange-traded funds and other similar securities; can only adjust investments twice per year[2]

Pros and cons of UGMA, UTMA accounts

UGMA and UTMA accounts can be used beyond educational purposes. This is good if you want to help a child when they become an adult but don’t want to rely just on college as a savings avenue. Money in these accounts can go to anything that benefits the child, whether that’s a down payment on a home or an actual home.

If you’re the beneficiary of one of these plans, you’ll get access somewhere between the ages of 18 and 25, depending on where you live. And once you take control of the funds, you’re free to use them how you see fit based on the guidelines set forth in the agreement before you became of age.

But they’re taxed in much the same way as taxable investment accounts, whereas 529 plans let you contribute, grow, and withdraw funds almost exclusively tax-free. That means less money stays with the account and more goes to paying taxes on that account.

“UTMA and UGMA accounts will become the child’s asset at the age of majority,” says Zimnoch. “This is not the greatest idea if [you] want to apply for financial aid [for college]. It’s also not the greatest idea if you’re not sure about how responsibly your children are going to spend money when they’re [of] age.”

These accounts are considered a child’s asset, which they’ll need to document when they complete the Free Application for Federal Student Aid, or FAFSA, for higher education funding. Both children and parents document their assets and a child’s assets are more heavily weighted when determining financial aid eligibility.

Pros

  • Can be used for education or other savings goals
  • Beneficiaries can use the funds as they see fit

Cons

  • Accounts are taxed like investment accounts, don’t enjoy the tax advantages of 529 plans
  • Could decrease the amount of college financial aid a beneficiary would otherwise receive

Tip

Before signing up for a UGMA or UTMA account, make sure you weigh the pros and cons first and determine if these options are right for you. If the taxes are too high or you think it’ll hold you back from receiving the most financial aid available, look into other types of accounts, like a 529 plan or Roth IRA.

Another option is cash value life insurance, which isn’t considered an asset and won’t be counted against either the parent or child to receive financial aid.

“I love the flexibility of a cash value life insurance policy,” Zimnoch says. “They don’t need to be used for college if your child gets a full ride or chooses to pursue a different route. [The account] can continue to accumulate, grow and be saved for things like a wedding, a future home purchase or a multitude of other things.”

Article Sources
  1. “Must-know facts about UGMA/UTMA custodial accounts,” Fidelity, May 13, 2022, https://www.fidelity.com/learning-center/personal-finance/custodial-account-for-kids.
  2. “An Introduction to 529 Plans,” U.S. Securities and Exchange Commission, Sept. 30, 2022, https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html.

About the Author

Dori Zinn

Dori Zinn

Dori has covered personal finance for more than a decade. Her work has appeared in the New York Times, Forbes, CNET, TIME, Yahoo, and others.

Full bio

Related Content