A Uniform Trust to Minors Act (UTMA) account is a custodial account set up under the rules of a state’s Uniform Gift to Minors Act. The money gifted to a child is put into an account. Typically, the parent acts as custodian for their child’s money until he or she reaches the age of 18 or 21.
In UTMA, parents cannot take the money back, and the children can eventually use it however they choose. These accounts are technically the children’s assets and include a tax break. The first $1,000 of investment income is tax-free and the next $1,000 is taxed at the child’s rate, which is almost always lower than the parent’s rate.
A 529 account is an account that has been created under Internal Revenue Code Section 529 to invest money for a child’s higher education. These accounts can be used for both college and trade schools, as well as graduate and special needs schools. 529 plans are set up by state, but parents can put money in this plan for the benefit of their child – and retain control. Furthermore, a 529 plan is tax-free if used for a qualifying college.
Colleges view UTMA accounts as a child’s asset to be used for schooling, but 529 plans are generally viewed as the parent’s asset.
You may ask, “What if my child does not go to college?” The account beneficiary in a 529 plan can also be changed to another family member with no penalty or taxes. If the funds are not needed for education, it can be easily withdrawn; but you will pay tax and face a 10% penalty on profits.