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College Saving: Flexibility or Control

February 01, 2023

Many of my clients have heard my speech on the two basic ways to save for college: “Do you want flexibility or control?” 

Flexibility:  The Uniform Transfers/Gift to Minors Act (UTMA/UGMA) which is a savings vehicle that is an asset of the child with a parent/grandparent being custodian while the child is a minor that can provide assets down the line for anything for the child; meaning you can use it to purchase a computer, braces, use it for a performance arts class, and yes, college education.  The program has some favorable tax features that make saving in this program enticing for some parents that just don’t know if their children are “college-oriented” or just want to save for their child for other reasons.

Control:  The 529 College Savings Plan (529 Plan) which has been the front-runner in parent savings choices who are focused on saving for college only.  While this remains a parent-owned asset (unlike a UTMA/UGMA which is the child’s asset – important when filling out your FASFA), it features tax-deferred growth.  And if a withdrawal is “qualified” (meaning funds be used for books/tuition/room/board or another qualifying purchase that universities’ define), then the withdrawal is tax-free.

Choosing a plan:  When it comes to financial aid, technically a 529 plan has far lower impact in the aid formula than the UTMA.  However, it’s been our experience that parental income is the overriding factor in determining aid, not their assets.

Each state has set up its own 529 program.  You may use it, any state plan, or any non-state approved 529 plan.  Check out those performance ratings at or or ask us to help choose which plan to use.  A reason to choose your own state’s plan is it offers a tax deduction for some of your contributions.

Conversely, a UTMA is not a program tied to any state, rather it is an investment account that you can set up with most financial institutions.

Plan investments:  The 529 offers many investment choices – pre-paid tuition, an age-based plan which invests more aggressively for younger children and moves to more conservative choices as college nears, or you can choose to manage your own allocation of investments.  With a UTMA, the custodian will manage the investments.

Contribution Limits:  There is no maximum annual contribution to either a 529 plan or UTMA.  However, gifts over $17,000/person or $34,000/married couple can trigger the need to file a gift tax return.  One exception allows a contribution of five years of the allowable gift at one time – a total of $85,000 in 2023 – allowing wealthy grandparents to get money out of their taxable estate!

You can start easily for as little as $25 with subsequent monthly bank drafts for $25.  Anyone – parents, grandparents, or friends – can make contributions to the plan for birthday or holiday gifts. 

Who Should Start the Plan:  The new tax law changes mean a parent or grandparent, or both can open with the same impact on financial aid.  In the past, withdrawals from grandparent-owned accounts impacted aid more heavily.

What If Money Isn’t Used for Education:  In a UTMA, funds can be used for the benefit of the child – not just education.  Braces, art lessons, a new computer, etc.  In 529 plans, withdrawals should be used for qualified college expenses.  If 529 monies weren’t used, the only choice was to transfer the funds to another qualifying child (or let the money grow for a future grandchild).  If 529 withdrawals are not used for college, it is subject to a 10% penalty and ordinary income taxes on the gain. 

SECURE 2.0 Act Changes:  Starting in 2024, 529 plans that are held at least 15 years can be rolled into a Roth IRA ($35,000 maximum) for the owner or beneficiary, subject to the annual Roth limits.  In addition, you are not allowed to roll any contributions made to the 529 plan within the previous five years.