Which is Better for College Savings: 529 or UTMA

When it comes to saving for college, there are many different ways it can be approached. And everyone has a different opinion as to which way is best. But, overall, there are two types of college savings accounts that are on par with each other. Ultimately, whether you choose to use a 529 account or a UTMA account will depend upon a few variables.

What is a 529 Account?

The most common college savings vehicle out there is the 529 account. Every state has their own version of a 529 account. And you don’t have to live in the state where you choose to get the 529 account for your children. This gives you a lot of flexibility when it comes to choosing the best account for your child.

529 college savings accounts are funded by mutual funds. So, when you choose to invest in one of these accounts, the money that is put into them is all pre-tax. You can schedule a certain amount to come out of your paycheck regularly so you don’t even realize it’s missing. Or you can throw money into your child’s 529 account whenever you happen to have an influx of cash.

529 Account Rate of Return

Either way, the money you put into a 529 account is a tax write-off. This is why a lot of people choose to invest in these types of college savings accounts for their children. The typical rate of return on these accounts can vary, of course. But, it traditionally hovers around 6%.

While that rate of return isn’t extraordinarily high, it’s better than just putting the money into a savings account. Plus, the potential tax write-off, saves you even more money in the long run.

What is a UTMA Account?

UTMA stands for Uniform Transfers to Minors Act. This is an account that I just learned existed a few years ago. And I am really glad that I did! These types of accounts are custodial accounts for minors that can be opened by anyone who wants to. Whoever sets them up manages the account until the minor becomes 18 (or in some cases 25). At that time, the minor child can use the account for whatever purpose they deem necessary.

However, these accounts are set up similar to Roth IRA accounts. In that they are made up of:

  • Bonds
  • Cash
  • Mutual Funds
  • Stocks

However, one difference is that they can also be made up of insurance policies and any form of property. Property can include houses and cars. So, if you want to include something like that in this account for your child, it could really bump up how much college savings they have when the time comes. Plus, this gives these types of accounts a ton of flexibility and chance for diversifying.

When money is put into a UTMA account, it then needs to be used to purchase bonds, mutual funds or stocks. Unless you are planning to add in the aforementioned insurance policies or property.

UTMA Account Rate of Return

We have been using UTMA accounts for our kids whenever they get money gifted to them. The rate of return on these is typically exponentially higher than even a high yield savings account can be. In fact, currently, our kids UTMA accounts have gained them anywhere from 37% – 44%. That is SO much better than even our best high yield savings account or a 529 account.

The only caveat is that any money, insurance policies or property that is put into these accounts can’t be withdrawn until the minor comes of age. So, these accounts are untouchable by anyone and everyone until then. These accounts are structured like this so that they can’t be inadvertently drained by a family member or even the child in times of hardship. So, this is something to keep in mind before you put anything into one of these types of accounts.

Which College Savings Vehicle is Better?

Now that we’ve talked a little bit about each type of college savings account, which one is best for you? Well, that’s going to depend on you and your child. If your child knows for sure they want to go to college, then the 529 plan may be the best route for you. This is especially true if you want/need extra annual tax write off’s.

However, if your child isn’t sure that they want to go to college, then you may want to go the UTMA route instead. The funds in a UTMA account can be used for anything your child wants once they take over the account. Whereas, the funds in a 529 account MUST be used for specific educational purposes only.

Therefore, if you open a 529 account for your child and then they decide they don’t want to go to college, that account won’t do them any good. You can transfer it to another child, but that’s really all you can do with it.

The UTMA account has a much better rate of return, but the funds won’t be able to be touched at all until the minor takes over the account as an adult. Sometimes, this is a limiting factor that people don’t like as much.

My Personal Opinion

Personally, I think having a mix of both a 529 and UTMA account for your child is the best way to go. Especially if they know they want to go to college. Any money that is gifted to them, or that they earned from allowance or helping people out, can go into the UTMA also. Therefore, having both types of accounts would be the best way to diversify their college savings options.

For one of my children, I only have a UTMA account and a Roth IRA because he has explicitly expressed that he has no desire to go to college. This child has already started earning some of his own money with his entrepreneurial ideas also. Which is awesome! But it makes a 529 account a moot point for him. So, instead, we just throw everything into the other two accounts so he can use it how he needs when the time comes.

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College Savings Accounts Summary

Ultimately, both a 529 account and UTMA account are great college savings vehicles. Which one you choose will really come down to whether or not your child wants to go to college for sure. If they aren’t sure yet, it might be best to have a mix of both types of accounts. This way your child has the potential for much higher returns on your investment. But, you can also take advantage of the tax write off’s from the 529 accounts. That’s what I call a win-win!

Which college savings accounts have you found are the best options for your child?