Editor’s note: This is the fourth article in a six-part series focused on paying for education using smart financial and estate planning. Other articles focus on direct tuition payments, 529 plans, Coverdell Education Savings Accounts, education trusts and family loans. See below for links to the other articles.
If you are thinking ahead about how to pay for a child’s education, you are doing the right thing. With the cost of education continuing to increase for college, graduate school and even private K-12 schools, smart financial planning can help you maximize your investment in education. Today, there are a number of ways to take advantage of tax benefits and other plusses while saving for schooling.
One option worth considering is a custodial account through the Uniform Transfers to Minors Act, or UTMA*. An UTMA is a type of savings account set up for a minor to use however they choose when they reach the age of majority in their state (generally 18 or 21). There are no limitations on the type of expenditures that can be paid for through an UTMA. While it may be used for tuition, room and board, books, etc., it can also be used to pay for a car, a down payment on a house or any other expense of the beneficiary’s choosing.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
An UTMA has broad investment options
The custodian of the UTMA typically has a broader range of investment options because they are not limited to investments on a state-sponsored platform or a particular bank platform. The account can be invested in a variety of assets, including individual stocks or bonds, mutual funds, ETFs and other vehicles.
While some families may prefer the flexibility of an UTMA, it does not have the same tax benefits as a 529 plan or Coverdell account, other popular savings vehicles. Earnings on assets inside of the account are taxable at the child’s tax rate up to a certain threshold, at which point the remainder is taxed at the parents’ tax rate. Depending on your or the beneficiary’s tax bracket, this can make an UTMA less appealing.
There are no limitations on contributions to an UTMA, which can come from parents, grandparents, other relatives and friends. It is important to note that similar to Coverdells and 529 plans, contributions to an UTMA are subject to federal gift tax laws.
An UTMA could impact financial aid
Although the adult owner acts as the custodian of an UTMA until the child reaches the age of majority, the funds in the account are considered the child’s assets and must be included on the FAFSA (Free Application for Federal Student Aid), which may reduce the amount of financial aid received.
Unlike a 529 plan and a Coverdell, an UTMA is not portable or transferrable to another child or another type of vehicle. However, given the additional flexibility regarding the unlimited potential uses of UTMA funds, it is unlikely to go unused.
Benefits:
- No limitations on the type of educational expenditures for which it can be used
- Can be used to pay for non-educational expenses if desired
- Investable in a broad range of options (not limited to the sponsoring state or bank)
Considerations:
- Income earned in the UTMA account is subject to taxes annually
- Contributions are subject to federal gift tax laws and limitations
- May reduce financial aid (account is included in FAFSA calculation)
- Not transferrable to another beneficiary and cannot be rolled over
- Minor can withdraw entire balance for any reason upon reaching majority
As tuition costs continue to climb, having a robust savings strategy is essential. An UTMA account provides plenty of flexibility, allowing funds to be used for a wide range of expenses. Although it lacks the tax advantages of some other popular savings options, its versatile investment choices and unlimited contribution potential make it a compelling choice for some families. By evaluating all available options, you can tailor your savings strategy to best support your child’s future goals and financial needs.
My next article will explore paying for education through an education trust.
* Much of what is discussed here also applies to UGMA (Uniform Gift to Minors Act) accounts, but for the purposes of this article, we’re focusing on UTMAs.
Other Articles in This Series
- Part one: Direct Tuition Payments: A Tax-Efficient Way to Pay for School
- Part two: 529 Plans: A Powerful Way to Tackle Rising Education Costs
- Part three: Coverdell Education Savings Accounts: A Deep Dive
- Part five: How an Irrevocable Trust Could Pay for Education
- Part six: How Intrafamily Loans Can Bridge the Education Funding Gap
-
Ask the Editor — Tax Questions on the New Senior DeductionAsk the Editor In this week's Ask the Editor Q&A, we answer tax questions from readers on the new $6,000 deduction for taxpayers 65 and older.
-
These Summer 2025 Back-to-School Tax-Free Weekends Are Starting NowSales Tax Over a dozen states offer back-to-school shoppers a sales tax holiday this summer.
-
Do You Need Flood Insurance? I'm an Insurance Expert, and Here's Where You Can Get ItStandard homeowners insurance does not cover flood damage, so you might need separate flood insurance, which you can get either through FEMA or private companies. Here are the details.
-
I'm an Investment Professional: These Are the Three Money Tips I'm Giving My College GradCollege grads can help set themselves up for financial independence by focusing on emergency savings, opting into a 401(k) at work (if it's offered) and disciplined, long-term investing.
-
Stock Market Today: S&P 500, Nasdaq Hit New Highs on Retail Sales RevivalStrong consumer spending and solid earnings for AI chipmaker Taiwan Semiconductor Manufacturing boosted the broad market.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
New SALT Cap Deduction: Unlock Massive Tax Savings with Non-Grantor TrustsThe One Big Beautiful Bill Act's increase of the state and local tax (SALT) deduction cap creates an opportunity to use multiple non-grantor trusts to maximize deductions and enhance estate planning.
-
Know Your ABDs? A Beginner's Guide to Medicare BasicsMedicare is an alphabet soup — and the rules can be just as confusing as the terminology. Conquer the system with this beginner's guide to Parts A, B and D.
-
I'm an Investment Adviser: Why Playing Defense Can Win the Investing GameChasing large returns through gold and other alternative investments might be thrilling, but playing defensive 'small ball' with your investments can be a winning formula.
-
Stock Market Today: Powell Rumors Spark Volatile Day for StocksStocks sold off sharply intraday after multiple reports suggested President Trump is considering firing Fed Chair Jerome Powell.
