How Do I Start Saving for My Child's Education – and What Exactly is an UTMA, UGMA, and a 529?
How Do I Start Saving for My Child's Education – and What Exactly is an UTMA, UGMA, and a 529?

In honor of National College Savings Day / National 529 Day – which is Sunday, May 29 – let’s dive into a few savings and investment options that you can use to help fund your child’s higher education.

Let’s go over the basics

UTMA stands for Uniform Transfer to Minors Act, and UGMA stands for Uniform Gift to Minors Act. Both UTMA and UGMA accounts are custodial trust accounts whereby a grantor (e.g., a parent) can transfer assets into the trust for the benefit of a child. Custodial account means that the grantor, as the custodian, must manage the money as a fiduciary for the benefit of the minor beneficiary. UTMA/UGMA accounts are irrevocable accounts, meaning that the grantor cannot later decide to take the money back. 

529s are state-run investment accounts that offer tax benefits when used to pay qualified education expenses for a designated beneficiary. Qualified education benefits have been recently expanded after the Tax Cuts and Jobs Act of 2017 to include not only traditional college or university attendance, but also vocational or other postsecondary educational institutions, as well as up to $10,000 to pay for private K-12 tuition per student per year. Qualified education expenses include tuition, room and board, books, equipment, and supplies. 

Who owns these accounts?

Because UTMA/UGMA accounts are irrevocable and a completed transfer of assets for the benefit of the child, these accounts are treated as owned by the child and no longer part of the grantor’s probate or gross estate.  As the grantor, you are simply the custodian of those funds. Once the child reaches the age of majority in your state, then they have full authority to withdraw all of the funds and to spend those funds entirely as they choose. They are not required to spend the funds on education.

A 529 contribution is treated as a completed gift by the donor and not a qualifying transfer subject to gift tax. As a result, the 529 account is not included in your gross estate, subject to an exception that we’ll discuss in the Contribution section below.  As the donor, you are the owner and the child is the designated beneficiary of the account, similar to a retirement account.

However, whether or not a 529 plan account is subject to estate tax or inheritance tax upon your death depends on which state you as the grantor lived in and which 529 plan you used. For example, the only 529 plan that is exempt from Pennsylvania inheritance tax is the College Career and Savings Program Account program, controlled by the Pennsylvania Department of Treasury. All other 529 plans are subject to Pennsylvania inheritance tax based upon the transferee’s tax rate.

Can I transfer these accounts to another child?

UTMA/UGMA accounts are irrevocable, controlled by the grantor, but owned by the child and therefore cannot be transferred to another child.

529 accounts are owned and controlled by the donor and can be used for one child or changed to be used for the benefit of another child. However, there are some restrictions on who you can transfer/change the beneficiary to. The IRS requires that the new designated beneficiary must be a qualified individual, meaning a member of the current beneficiary’s family (i.e., spouse, in-laws, children, siblings, nieces/nephews, aunts/uncles, first cousins).

How much can I contribute to the account?

UTMA and UGMA accounts have no contribution limit. However, you should speak with a knowledgeable tax professional (accountant, tax attorney, etc.) to discuss your potential tax consequences if you give more than $16,000 per child per year because you may use up a portion of your federal lifetime gift tax exemption and need to file a 709. Currently the exemption is $12.06 million per individual or $24.12 million per married couple.

The same annual contributions rules apply to 529s; however, there is also the ability to "front-load" a 529 plan. Front-loading allows you to give five years' worth of annual gifts at one time without paying a gift tax or using any portion of your lifetime gift tax exemption. For example, in 2022, that would be a one-time contribution of $80,000 per person, per beneficiary. However, front-loaded funds are removed from your gross estate on a pro-rata basis. That means if you die two years after making the front-loaded five-year contribution, then only the first two years of the contribution will be removed from your gross estate. 529 plan lifetime contribution limits vary by state. As of 2022, Pennsylvania has a lifetime contribution limit of $511,758 and West Virginia’s limit is $400,000. Meanwhile, North Dakota has a mere $269,000 limit.

Federal Income Tax Consequences

UTMA/UGMA accounts do not grow income tax deferred. All income will be subject to tax annually. If these accounts have investments that perform well and bring in significant income, then you should be aware of what is called the Kiddie Tax,” or tax on a child’s investment and other unearned income. As of 2022, under the Kiddie Tax, a child’s first $1,100 of unearned income is tax free at 0%; the next $1,100 is taxed at 10%; and anything above $2,200 is taxed at the parents’ tax rate. For example:

  • If the UTMA/UGMA earns income of $1,100, then 0% tax is applied and no income tax is owed.
  • If the account has income of $2,200, then $1,100 is income tax free, and the reaming $1,100 is subject to 10% income tax to the child.
  • If the account earns income of $3,000, then $1,100 is income tax free, the next $1,100 is subject to 10% income tax, and the remaining $800 is subject to the parents’ income tax rate, and all of this tax is owed by the child on their annual income tax return.

529 accounts grow on an income tax deferred basis and withdrawals are tax free if that money is used to pay for qualified higher education expenses, discussed above. There is no federal tax deduction for 529 account contributions. 

However, some states, such as Pennsylvania, permit a taxpayer to deduct 529 contributions from state taxable income. Pennsylvania allows a deduction of up to $16,000 per beneficiary per year, or $32,000 per beneficiary per year for married couples.  West Virginia also offers an income tax deduction to its residents and does not currently limit that deduction. 

If a 529 is used for anything other than education, such as jewelry, then you will have to pay both federal income tax and a 10% penalty on that pair of earrings. However, the penalty is waived if the beneficiary receives a full scholarship to college. 

And, as we already discussed, 529s are transferable, so if your child decides not to go to college or any other higher educational program, then you can use the account for another family member of the current beneficiary and/or you could use the money yourself to go back to school.

Can Creditors Access these accounts?

Because the UTMA/UGMA accounts are not owned by you, your creditors can not reach into those accounts, and they remain protected for your child’s benefit. However, the reverse is also true – because these accounts are owned by your child, their creditors can reach your child’s UTMA/UGMA accounts.

Do These Accounts Effect Financial Aid?

When your child applies for college, they will likely fill out a Free Application for Federal Student Aid (FAFSA). FAFSA weighs the assets and income of not only the parents but also the applicant student child through a valuation resulting in a Student Aid Report which analyzes the Expected Family Contribution (EFC). 

Parents’ assets are weighted at low rate of up to 5.64% and their income is weighted at 22% to 47%. Meanwhile, an applicant student’s assets are weighted significantly higher at a rate up to 20%, and student income is counted at a rate of 50% (after an allowance of $6,970 for 2021-2022). However, assets are generally not counted at all for families with dependent students where the parental adjusted gross income is under $50,000.

As a result, UTMA and UGMA accounts are weighted at a higher rate of 20% against the student’s FAFSA application because the student is the owner of the account. This is unlike a 529 account, which is weighted only up to 5.64% because it is the asset of the grantor/parent.


Who Owns the Account? Child Child Grantor
Is the Account Transferable? No No Yes, with some restrictions
Who Pays the Federal Income Tax? Child Child *Grows income tax deferred AND not subject to income tax if withdrawn for qualified education expenses
Can My Creditor Access the Funds? No No Yes
Can My Child's Creditor Access the Funds? Yes Yes No
Financial Aid Implications Weighted heavily (20%) against the child applicant’s EFC Weighted heavily (20%) against the child applicant’s EFC Weighted lower (5.64%) against the child applicant’s EFC

Contact a member of our experienced Tax Team to discuss your family's needs and to start putting a custom planning strategy in place today for your children's education.