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College savings vehicles

March 23, 2023
clock 3 MIN READ

The Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are pieces of legislation designed to allow minors to own securities and other types of property without requiring the services of a lawyer or a court-appointed trustee. These vehicles, known as custodial accounts, have become popular methods to set aside money for future college expenses. 529 plans, another popular college savings vehicle, have the advantage of additional tax benefits but also have more significant investment restrictions. Before choosing which vehicle is right for your family, it is important to evaluate the costs and benefits of each.

Custodial accounts (UTMAs/UGMAs)


  • Greater range of eligible contributions; donors can contribute real estate, patents, art, and inheritance
  • Few investment restrictions
  • Account requires only an appointed trustee and the name and social security number of the minor
  • The contribution is removed from the donor's estate unless the donor is also the custodian


  • Considered assets of the minor for financial aid purposes, can impact FAFSA eligibility
  • Gifts are irrevocable
  • Minor receives full control of assets at age of trust termination
  • Trust income must be reported on child's tax return and is taxed at the minor's rate

529 plans


  • Contributions are non-deductible on the federal level and generally not for the state level, but distributions used for qualifying expenses are not taxed as income
  • The value of the contribution is removed from the donor's estate in most circumstances
  • Plans are transferrable to another member of the beneficiary's family
  • No age restrictions
  • Considered donor's assets for financial aid purposes


  • Contribution limits are set by state. Range runs from $235-$511K depending on the state.
  • Investment strategy is limited by the plan's sponsor
  • Non-qualified expenses are subject to a 10% penalty and federal income tax

It is important to stress that once the beneficiary reaches the age of termination, they have total control over the custodial account's assets. There is no guarantee that the funds will be used for college expenses. Custodial accounts generally also receive no special tax treatments. By contrast, 529 plans offer significant tax benefits and distributions face hefty penalties if not used for qualified expenses. These advantages come at the cost of flexibility. Usually the state plan's sponsor offers only a few investment strategies. Note, the Coverdell ESA is an alternate plan with increasing popularity, but is reserved for those with lower incomes and is not usable for affluent customers. Carefully weigh your goals against the strengths and weaknesses of each vehicle. 

SEI Private Wealth Management is an umbrella name for various wealth advisory services offered through SEI Investments Management Corporation ("SIMC"). This presentation is proved by SIMC, a registered investment adviser and wholly owned subsidiary of SEI Investments Company.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only and should not be interpreted as legal opinion or advice.

Neither SEI nor its affiliates  provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

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