3 Advantages of Using a UTMA Account.
When it comes to saving for your child’s future, there are a variety of options to choose from. Two popular choices are UTMA accounts and 529 investing accounts. In this blog post, we will explore the advantages of a UTMA account over a 529 investing account and why you should choose to use a UTMA account to save for your child’s future.
First, let’s define what a UTMA account is and how it works. A UTMA account, or Uniform Transfers to Minors Act account, is a type of custodial account that allows you to transfer assets to your child while maintaining control of the account until your child reaches the age of majority, which is typically 18 or 21 depending on the state. UTMA accounts can hold a variety of assets, including cash, stocks, bonds, and real estate. Once your child reaches the age of majority, they take control of the account and can use the funds for any purpose.
A 529 investing account, on the other hand, is a tax-advantaged savings plan designed specifically for education expenses. 529 plans can be used to save for qualified education expenses, including tuition, fees, room and board, books, and supplies. Funds in a 529 plan can be invested in a variety of investment options, such as mutual funds and exchange-traded funds (ETFs), and withdrawals are tax-free when used for qualified education expenses.
Now that we have a better understanding of what UTMA accounts and 529 investing accounts are, let’s explore 3 advantages of a UTMA account compared to a 529 investing account.
Flexibility
One of the biggest advantages of a UTMA account is its flexibility. Unlike a 529 plan, there are no restrictions on how the funds in a UTMA account can be used. This means that you can use the funds for any purpose that benefits your child, such as buying a car, paying for summer camp, or investing in a business venture. With a 529 plan, funds can only be used for qualified education expenses, which limits your flexibility and control over how the funds are used.
This flexibility is particularly useful if you’re not sure if your child will pursue higher education. While a 529 plan can be a great way to save for college, if your child decides not to go to college, you may be limited in how you can use the funds. With a UTMA account, you have more control over how the funds are used and can ensure that they are used to benefit your child, regardless of whether or not they go to college.
No contribution limits
Another advantage of a UTMA account is that there are no annual contribution limits. This means that you can contribute as much as you want, whenever you want, without worrying about exceeding a yearly maximum. With a 529 plan, there are annual contribution limits that vary by state and can range from $235,000 to over $500,000.
This lack of contribution limits means that you can take advantage of market opportunities as they arise. For example, if you have extra cash on hand and the market is experiencing a downturn, you can use that cash to make a large contribution to your child’s UTMA account and take advantage of the lower stock prices. With a 529 plan, you may not be able to contribute as much as you want at any given time, which can limit your ability to take advantage of market opportunities.
Tax advantages
UTMA accounts offer several tax advantages that make them an attractive option for parents who want to save for their child’s future. The first $1,100 of earnings in a UTMA account is tax-free, the next $1,100 is taxed at the child’s rate, and any additional earnings are taxed at the parent’s rate.
Although both types of plans can be beneficial in saving for the future, UTMA accounts offer more flexibility and even some tax advantages. With UNest, you can create a UTMA account for your child from day one and begin contributing every month towards building their nest egg, whether it be for college, a first car, or even a down payment on a home.
UNest is here to help with any of life’s purchases. Friends and family can also contribute towards your child’s future by sending cash gifts for holidays, birthdays, or any occasion.
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This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
