A 529 account is better than a UGMA or UTMA account.

UGMA/UTMA Accounts were created under the Uniform Gift to Minors Act/Uniform Transfers to Minors Act to hold money or property that was gifted or transferred to a minor without a trust. The primary difference between UGMA and UTMA accounts is that UTMAs allow for a wider range of transferable assets–including real estate and other tangible personal property. Money in an UGMA/UTMA Account is a permanent gift to the minor beneficiary. Money withdrawn from an UGMA/UTMA Account can be used only by the beneficiary or used on the beneficiary’s behalf. Funds can be managed by the beneficiary once they reach the age of majority–typically age 18 or 21, depending on the state. UGMA/UTMA accounts are fully taxable custodial accounts. Earnings–dividends, interest, and capital gains–are taxed annually. For children under 19 (or full-time students under 24), the so-called "Kiddie Tax" applies in 2026 once unearned income exceeds $2,700: the first $1,350 is tax-free, the next $1,350 is taxed at the child’s rate, and anything above $2,700 is taxed at the parents’ rate.

A significant difference between 529 plans and UTMA/UGMA accounts is their treatment under federal financial aid formulas. Parent-owned 529 plans are assessed at a maximum of 5.64% in the Student Aid Index (SAI) calculation, which replaced the Expected Family Contribution (EFC) beginning with the 2024–25 award year–meaning for every $10,000 in a parent-owned 529, financial aid eligibility is reduced by only $564. Grandparent-held 529 accounts are no longer reported, giving them a 0% assessment. UTMA/UGMA accounts are instead considered student assets and assessed at 20%–meaning the same $10,000 reduces financial aid eligibility by $2,000. Over 4 years of college at $20,000 per year, this could mean an approximate $16,000 difference in student aid eligibility.

The major trade-off becomes flexibility versus tax-free earnings. UGMA/UTMA accounts offer broad use — the funds can be used for anything without penalty — while 529s offer tax benefits specifically for education. Internal Revenue Service

It should be emphasized that the child is the legal owner of a UGMA/UTMA account, and when that child reaches the age of majority he or she gains full, unrestricted fund access. It is also not possible to change the beneficiary of a UGMA/UTMA — the account is irrevocably the named child's. Path2college529Education Data This loss of parental control can many times become a significant estate planning and practical concern. The parent has no legal authority to prevent the child from spending the money on anything they choose. A 21-year-old receiving a large UGMA/UTMA balance has complete freedom to spend it on a sports car rather than college tuition.