When most people save for college, they think they have to decide between the 529 and the UTMA.  As you’ll see they each have their pros and cons.  But there is actually a way to take advantage of the best that each of these have to offer – all at the same time.

529 Benefits

The 529 plan offers both tax-free growth and withdrawals.  That’s pretty cool.  They also provide plenty of control over who gets the money. They only problem with these plans is that they don’t offer many investment choices. Also, it’s tough to get a tax deduction for these contributions (although not impossible).


UTMA accounts offers deferred growth but withdrawals are fully taxable.  Also, you do not have much control over who gets the money. Once your child turns 18 or 21, the money belongs to them. But where the UTMA shines is in the investment choices they provide. You can invest a UTMA any way you like.

Most people think they have to choose between the tax benefits of the 529 and the investment flexibility of the UTMA.  No longer.  You can have both.

You see, the tax benefits offered by the 529 are mostly wasted during the first several years. This is because a child can earn $1,900 in investment income and pay no tax whatsoever. That means, from a tax standpoint, that the UTMA is “tax-free” just like the 529 for most people during the first several years.

If you only put a few thousand dollars a year into the 529 or UTMA, it may take several years before you reach the point where the investment earnings exceed the threshold (currently $1,900).

So while the UTMA account grows, take advantage of the investment flexibility. Once the account grows to a point where it’s earning more than the threshold amount, roll it over to a 529.

This is very easy to do. No taxes will be due on the rollover and at that point, you can take advantage of the tax benefits offered by the 529.

The only downside to this strategy is that you lose control over who ultimately gets the money. In other words, if you start a UTMA account in the name of your daughter Jane and then move the money over to a 529 plan, Jane must remain the beneficiary of the account even though it becomes a 529.

For most people, this is a not a problem. If your child doesn’t end up going to Gwynedd Mercy or another college, she can still use the money in the 529 to get trained for a job that doesn’t require a four year degree.”

So this strategy provides the investment options of a UTMA with the tax-free withdrawal benefits of the 529.

Does this seem like a valuable plan? What is your strategy for college savings plans?

This guest post was written by Neal Frankle, Certified Financial Planner.    He also runs and