Saving for College: 529 vs. UTMA

So you’ve decided that you need to plan for the future, and you’ve got your retirement plan in order. Now it’s time to decide how exactly to save for college. There are two main tools to chose from when making your college savings plans:

  • College 529 Plan- A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. The appeal of the 529 plan is that it grows tax-deferred, and the distributions used for college expenses are also tax-deffered. This means that as long as the funds are used for college and college-related expenses, no tax is paid. Another benefit of the plan is that the owner of the plan (not the beneficiary) maintains control of the distribution and use of funds. The plan even allows for the funds to be used for non-college expenses (but those distributions are taxed). The downside of the plan is that if the funds are not used for college or college related expenses, a 10% penalty is assessed, as well as tax on the gains. To avoid this, the owner may transfer to a different beneficiary at any time.
  • Uniform Transfers to Minors Act (UTMA)- An UTMA is an account in which a donor may give toward a minor until the minor reaches a set age (between 18-27 as stated by the custodian). Upon that age, the beneficiary gained full control of the funds and may use them however they deem fit. The benefit is that the funds are not tied to only college-related expenses. The downside is that the donor/custodian has no control over the funds after the child reaches a certain age, so if the kid wants to skip college and travel Europe, they can fund their trip with their UTMA.
I can say that I went with the 529 plan for my daughters and have a small amount automatically drafted from our checking account monthly.
I hope that this information has been helpful as you plan for the future.

One thought on “Saving for College: 529 vs. UTMA

  1. Pingback: Budgeting 101 |

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s