How an UTMA Compares to a 529 Plan

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Editor's note: On December 12, 2022, this article was edited to reflect the correct federal tax rates for trusts. On December 17, it was corrected again.

The cost of higher education has skyrocketed over the last few decades and shows no signs of slowing. That’s why it’s more important than ever that parents start saving as early as possible for their children’s future. There are two types of tax-advantaged accounts for saving for college expenses: A Uniform Transfers to Minors Act (UTMA) account and a 529 Plan. While both plans have their differences and advantages, you may want to consider both as viable options. Once a parent has set up the accounts, simply contributing automatically via direct deposit every month is a major component to successfully investing for their future.

What is an UTMA?

The Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) allow for the creation of custodial accounts on a child’s behalf. You can open such an account for a child or grandchild, make deposits for them and manage it until they’re adults (somewhere between 18 and 25, depending on state law). The main difference between the two accounts is what sorts of investments you can place in them. In a UGMA account, you can only invest in securities, cash and insurance, while UTMA accounts also allow for real estate and alternative investments.