The cost (tuition and fees) of attending a public four-year institution has grown an average of 7% annually over the past two decades. This steady rise in tuition highlights the need for families to plan ahead and choose the right savings strategy to support their child’s education. The university price tag underscores the importance of saving for your child’s education early. Understanding the different options available can help you make informed decisions that align with your financial goals and provide the right level of control and accessibility when the time comes to use the funds.  

Education Savings Options

There are several ways to save for a child’s education, each with unique benefits and considerations. Uniform Gifts to Minors Act (UGMA), Uniform Transfers to Minors Act (UTMA) and 529 plans are three common options that vary in terms of tax advantages, ownership rules and impact on financial aid. Understanding these differences can help you determine which approach best suits your family’s needs and long-term financial plans. 

Uniform Gifts to Minors Act/Uniform Transfers to Minors Act

• A UGMA or UTMA account is a type of custodial account.
  • UGMA allows minors to own financial assets such as cash, stocks and bonds.
  • UTMA accounts expand on UGMA, permitting ownership of additional assets including real estate, art and other types of property.
• You are the custodian of the account until the child reaches the age of majority in your state. (Age of majority in Texas is 21.) 

529 Plan Accounts

• 529 plans are tax-deferred savings plans that were specifically designed for families to save for college education.
• 529 account contributions are controlled by the owners, typically parents or grandparents, for a designated beneficiary.
• With the 2017 Tax Cut and Jobs Act (TCJA), families may use up to $10,000 of 529 account funds toward K-12 tuition.
• Funds from a 529 account must be spent on qualified education expenses, or taxes and penalties may be incurred.

Tax Rules 

Tax efficiency plays a key role in how education savings grow over time. While UGMA and UTMA accounts are subject to different tax treatments than 529 plans, each has implications for investment growth, withdrawals and potential tax liabilities. Comparing these rules can help you optimize tax benefits while staying aligned with your financial strategy. 

• UGMA and UTMA accounts follow the kiddie tax rule. The first $1,350 of a child’s unearned income from a UMGA or UTMA account is not taxed. The next $1,250 is taxed at the child’s tax rate. Any amount above $2,700 is taxed at the parents’ marginal tax rate.
• 529 account withdrawals are exempt from federal income taxes if used for qualified education expenses.

Beneficiary Change

Flexibility in beneficiary changes can be an important factor when selecting an education savings plan. Understanding these rules can help ensure your savings remain adaptable to your family’s evolving needs. 

• Once established, the UGMA and UTMA account beneficiary may not be change.
• The owner of 529 account s may change the account beneficiary at any time. This creates greater flexibility if the original beneficiary does not utilize all of the funds.   

Use of Funds

How funds can be used is another key consideration when choosing the best type of account. Each education savings option comes with its own restrictions on how funds can be used. Evaluating these differences can help you choose the plan best supports your anticipated needs. 

• Funds in a UGMA or UTMA account may be used for non-educational expenses for the benefit of the child.
• 529 savings accounts may only be used for qualified educational expenses. 

Financial Aid Impact

Education savings accounts can impact a student’s eligibility for financial aid. The way assets are reported and considered in financial aid calculations varies between UGMA, UTMA and 529 plans. Understanding these implications can help you make strategic decisions to maximize financial aid opportunities while maintaining a strong savings plan. 

• Funds within a 529 account are considered parental assets, while assets in a UGMA and UTMA account are considered the child’s assets.
• UGMA and UTMA accounts will likely reduce aid eligibility, while a 529 account could potentially reduce the amount of financial aid, depending on account ownership.   

529 Accounts - Options to Rollover to Roth IRAs 

Recent legislative changes allow unused 529 plans to be rolled over into a Roth IRA under certain conditions, providing an extra layer of flexibility to repurpose excess education savings into a long-term retirement asset. 

The SECURE ACT 2.0, passed by Congress in 2022, allows 529 account owners to transfer up to a lifetime maximum of $35,000 to a Roth IRA for a beneficiary. The rollover is tax/penalty-free and can only occur after the 529 account has been open for 15 years. Additionally, the rollover requires any transferring funds to be in the 529 account for at least five years prior to transfer. Standard Roth IRA contribution limits of $7,000 for those under age 50 and income limits ($150,000 for single filers or $236,000 for joint filers) do apply. Income limits are subject to the beneficiary’s modified gross income.  

Example - Rollover of $22,000 from a 529 account to a Roth IRA. 

This example assumes no contributions are made over this time period and the contribution limits do not change. Income limits and Roth IRA rules apply.

Conclusion

Choosing the right education savings strategy involves more than just setting money aside — it’s about understanding how different options impact taxes, beneficiary flexibility and financial aid. Each approach has its advantages, and the right choice depends on your financial goals and family needs. By working with a Texas Capital Private Bank advisor, you can gain clarity on the best path forward and ensure your savings strategy is both effective and adaptable. Connect with an advisor in your area to start building a plan that supports your child’s future while aligning with your broader financial vision.