Like most young families, our days lately have consisted of applying sunscreen, helping coach tee-ball (which resembles herding kittens), reapplying sunscreen, going swimming, and doing a final application of sunscreen, followed by slip ‘n’ slides and water balloons. The day turns to evening, and then we get to watch Kansas thunderstorms roll in from across the Great Plains as lightning flashes among dark clouds, followed by rolling thunder.
Summer is here! I hope you are enjoying it to the fullest because it doesn’t last long. Or you could be on the side that believes summer lasts too long while wishing the warm weather would subside sooner rather than later.
Regardless, summer will come to an end, and kids will go back to school. As they do, parents often think about their children’s future as the kids gear up to enter a new school year, where they will learn and expand their knowledge base. While thinking about their kids’ well-being, parents often consider the expenses related to their education and other needs.
If parents decide they’d like to save for their children’s future expenses, they are likely wondering which investment vehicle is best for them to use. Let’s compare the similarities and differences between two popular options: Uniform Transfer to Minors Act (UTMA) custodial accounts and 529 plans.
What Is a UTMA?
A UTMA account allows you to gift money or assets to a minor. The custodian, most commonly the parent or a relative of the minor, manages the account until the child reaches the age of majority. The age of majority varies by state and typically ranges from 18 to 25 years of age (e.g., the age of majority in Kansas is 18).
An individual can easily open a UTMA account with a brokerage firm (e.g., Fidelity Investments, Schwab, Vanguard). After being funded by the custodian, the account can be allocated across various investment choices, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
The main advantage of a UTMA for the benefit of a minor is that funds in the UTMA can be withdrawn to cover non-essential expenses that benefit the child and are not restricted to education costs. For example, the custodian can withdraw funds from the child’s UTMA account for costs such as summer programs, high school field trips, and even their first car.
Contributions to a UTMA use after-tax dollars, so those funds are not taxed when distributed from the account. Although the custodian manages the UTMA, the assets legally belong to the minor. Therefore, realized capital gains resulting from the sale of shares of stocks and/or bonds are initially taxed to the minor and then to the custodian once certain thresholds have been reached.
Those realized capital gains are considered unearned income to the minor and, under 2025 tax law, are taxed as follows:
- The first $1,350 of total unearned income is tax-free from being covered by the standard deduction for dependents.
- The next $1,350 of unearned income is taxed at the child’s tax rate.
- Finally, unearned income greater than $2,700 is taxed at the custodian’s tax rate as part of the Kiddie Tax Rules.
Before opening a UTMA for the minor, you’ll want to evaluate whether you believe the minor will be applying for financial aid for college or a trade school. Because a UTMA is considered the child’s account, the funds will count as the minor’s assets on the Free Application for Federal Student Aid (FAFSA), which can reduce eligibility for financial aid.
Additionally, the custodian loses control of the assets in the UTMA once the minor reaches the age of majority. At this point, the UTMA will be transferred into the child’s name, with no restrictions on how the funds are used.
What Is a 529 Plan?
A 529 plan is a tax-advantaged investment account specifically designed for saving for education. Funds from a 529 plan can be used for qualified education expenses, including tuition, room and board, fees, books, and even K-12 tuition.
Contributions to the account are made with after-tax dollars, and earnings grow tax-free. Additionally, withdrawals for qualified education expenses are tax-free, and you’re allowed to withdraw up to $10,000 per year.
The individual who opens a 529 plan is the account owner and retains control of the assets. This affects the student’s financial aid eligibility less than a UTMA because the 529 funds are considered the property of the plan owner.
Additionally, the owner can change the beneficiary at any time.
Similar to a UTMA, 529 plans have restrictions and limitations. For instance, the earnings (realized gains) from withdrawals for non-qualified expenses are subject to income tax and a 10% penalty. Also, the investment options within 529 plans are limited.
Unlike a UTMA, the minor does not own the account, which could be considered a drawback for those who want to gift funds to the minor.
So, Which Is Right for You?
The choice depends on your priorities and the intended use of the funds. If education and paying for qualified education expenses are your priorities, then a 529 plan is a better option due to its tax advantages. However, if flexibility is your focus, then a UTMA may be more suitable because it allows for the use of funds for other purposes, such as to help with a wedding or business venture or to give the minor a head start as they enter early adulthood.
Please speak with your CWP advisor if you’d like help reviewing your options or understanding how each strategy fits into your financial plan.
I hope you are enjoying your summer as best you know how, because it will be gone before you know it. Remember to stay cool and hydrated on these hot days, and don’t forget the sunscreen!
