financial literacy

UGMA vs. 529 Plan: Which is Better?

We’ll tell you about UGMA & 529 plans, how they’re different, and the benefits of both so you can confidently decide which option is the best choice for investing in your loved one’s future.

Last updated:

April 15, 2022

EarlyBird helps parents, family, and friends collectively invest in a child’s financial future. Learn more.

What You'll Learn

Coming of age is hard. Young adults have a number of life-altering decisions facing them, from what kind of career they want to have to where and how they want to live their life. 

It’s natural that you want to make this transition into adulthood as easy as possible for the children in your lives. 

And what better way to do that than by helping set them up for financial success? This ensures that they can make choices based on what’s important to them, instead of on how to best pay their bills. 

Two popular means for helping children get ahead in life are UGMA accounts and 529 plans. 

We’ll break down what they are, how they’re different, and the benefits of both so you can confidently decide which option is the best choice for investing in your loved one’s future. 


What is an UGMA Account?

A Uniform Gifts to Minors Act (UGMA) account is a type of custodial account where parents and other loved ones can save for a child’s financial future. 

These accounts are an excellent way for families to collectively invest in the children they love, helping financially prepare them for future goals.

Parents and other loved ones can open UGMA accounts on behalf of a child in their life. The adult that opens the account (known as the custodian) manages the account, including making investment decisions. 

These accounts can hold a wide variety of investments, including individual stocks, bonds, mutual funds, index funds, ETFs, cash, and insurance policies. Basically everything you need to provide financial security for a child you love. 

When loved ones contribute to an UGMA account, they’re making an irrevocable gift. Once assets go into the account, the custodian can’t withdraw them. 

There are rare exceptions in cases where the money will go to benefit the child. However, the money can’t go to pay for the typical costs that come with raising a child.

Once the child reaches adulthood, they gain full control of their UGMA account and the financial gifts they’ve received from loved ones. Those years of meaningful gifts can help them pursue their goals, whether it’s a college education, a business venture, or any other personal goals.

There are few limits on how families can use UGMA accounts to invest in their loved ones. 

This makes them an ideal choice for families wishing to make a lasting and meaningful contribution to their child’s future. There are no contribution limits, no limits on how the child can spend the money, and few limits on how the custodian can choose to invest the funds. 

For tax purposes, the child whose name is on the UGMA account is the owner of all assets within the account. As a result, earnings on those assets come with some perks under the “kiddie tax” laws.

The first $1,100 of a child’s unearned income — which includes investment earnings within an UGMA account — are tax-free. The next $1,100 of earnings are taxed at the child’s tax rate. Any earnings that exceed $2,200 are taxed at the parent’s tax rate.

What is a 529 Plan?

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A 529 plan is a tax-advantaged account designed to help families save for their loved ones’ education expenses. 

There are two different types of 529 plans. The prepaid tuition plan allows parents to pre-pay the cost of an in-state college education. By doing so, families lock in a lower tuition rate than their children are likely to pay in the future.

The more common 529 plan is the college savings plan. 

With this type of account, loved ones can contribute to the account and invest the contributions in available portfolios and mutual funds. The investments grow tax-free. Then, the child can take tax-free distributions from the account to pay for qualified education expenses.

The money in a 529 college savings plan can only be used for certain expenses. Qualified education expenses generally include:

  • Tuition
  • Fees
  • Textbooks
  • Room and board
  • Computers 

If families use the money in a 529 savings plan for anything other than qualified expenses, they’ll have to pay taxes on their earnings and will be subject to a 10% tax penalty. 

If the designated beneficiary of a 529 plan chooses not to pursue higher education, families are limited to a handful of options for the funds, including waiting to see if the beneficiary changes their mind, or transferring the money to another family member.

Each state regulates 529 plans individually. The rules are similar from state to state, but each state does have its own “aggregate contribution limit”, which is the maximum amount that can be contributed to the 529 plan for one beneficiary.

But, most families don’t need to worry about reaching these aggregate limits, as they range from $235,000 to $529,000.

What is the Difference Between an UGMA and a 529?

Now that we’ve discussed the basic features of UGMA accounts and 529 plans, there are a few key differences we’ll take a look at.

Account ownership

One significant difference between an UGMA account and a 529 plan is who actually owns the assets within the account.

While a parent may open a 529 plan in the name of a child, the parent (or another loved one who opens the account), maintains ownership. They can use the money to pay for the child’s education, transfer the money to another child, or withdraw the money from the account (though there are penalties if they don’t spend it on higher education expenses).

Contributions into UGMA accounts are irrevocable gifts and belong to the child as soon as they go into the account. When loved ones contribute to an UGMA account, they can rest assured that their loved one will have access to their meaningful gift once they reach adulthood.


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Perhaps the most noteworthy difference between an UGMA account and a 529 plan is the flexibility that comes with UGMA accounts.

529 plans are designed to pay for education expenses. And while there are some tax benefits to these accounts, the tradeoff is that you can’t use the money for other purposes. If you use the funds for non-qualifying expenses, you’ll pay a financial penalty.

In the case of UGMA accounts, there are no restrictions on what the child can spend the money on. Once they receive the assets, they can use the money to pursue any goal they wish.

When you start saving money for a child, there’s no way to know what their future will look like. More than anything, you want them to have the freedom to pursue their greatest goals. And you want your financial gifts to help them do just that.

Tax features

UGMA accounts and 529 plans are treated differently for tax purposes. First, contributions to UGMA accounts are made with after-tax money. The earnings on the assets within the account are taxed using the special kiddie tax laws, meaning the first $2,200 of earnings have certain tax advantages.

529 plan contributions are tax-deductible on many state tax returns (though you can’t deduct them for federal income tax purposes).

Another feature of 529 plans is that the money grows tax-free, and families can use the money tax-free as long as they spend it on qualifying educational expenses.

Contributions to both UGMA accounts and 529 plans have the potential to be subject to the gift tax, but that’s very rare. The IRS requires someone to file a gift tax return when they gift more than $15,000 to another person in one year.

Don’t worry — filing a gift tax return doesn’t mean you’ll end up paying the gift tax.

 When you file a gift tax return, your total gift amount is subtracted from your lifetime exclusion, which is $11.7M in 2021. Once you exceed $11.7M in gifts, you’ll start paying the gift tax.

Impact on financial aid

UGMA accounts and 529 plans impact a child’s financial aid prospects differently. 

For financial aid purposes, the money in a 529 plan is considered to be the parents’ assets. Colleges don’t expect parents to use all of their assets to pay for their kids’ college education. As a result, money in a 529 plan will have only a minor impact on financial aid eligibility.

Assets in an UGMA, on the other hand, are the child’s assets. Financial aid offices expect students to use a larger percentage of their assets to pay for college. Therefore, money in an UGMA account may reduce the amount of financial aid a child is eligible for.

Which is Better, an UGMA or a 529?

UGMA accounts and 529 plans can both be effective ways to save for your loved one’s future, but it’s important to consider the pros and cons of each option before committing to one.

The true advantage of 529 plans is their tax advantages. 

Those advantages include:

  • Tax-deductible contributions in many states
  • Tax-free growth
  • Tax-free use on education expenses

But with those advantages come some serious restrictions. Many families start saving for their child’s future when the child is very young. And at that age, there’s no way to know what your child’s future will look like.

By contributing to an UGMA account, loved ones are supporting a child’s future goals no matter what they look like. Whether they decide to attend college, start a business, or travel the world, your gift will be there to help them.

Another advantage of UGMA accounts is that the money is guaranteed to go to the intended recipient. 

With 529 plans, the parents own the account. You may gift the money to one child, but the parent can choose to redirect it to one of their other children, or even themselves.

But when you contribute to an UGMA account for a child in your life, you know they’ll benefit from the funds.

Why EarlyBird For an UGMA Account?

EarlyBird provides a simple and innovative way for families to save for a child’s financial future. 

Through the app, a parent or other loved one can open an UGMA account for a child. When they open the account, they choose between five different ETF portfolios that range from conservative to aggressive. 

Additionally, they have the option to allocate up to 5% of the fund to values-based funds.

EarlyBird makes the investment process easy. You share the child’s age, your risk tolerance, your investment goals, and the time horizon. EarlyBird will then recommend a portfolio that fits your needs.

Once the account is set up, the custodian can invite other loved ones to contribute. With just a few steps, anyone can transfer money into the account. You’ll also have the option to leave a video message, which helps to personalize your gift.

When the child reaches adulthood and takes control of the account, they’ll get to scroll through their memories feed filled with videos from those who love them.

How Do You Open an UGMA Account?

Ready to open an UGMA account for a child you love? The process has never been simpler, and you can have your account set up quickly.

  1. Choose the right brokerage firm. There are many brokerages to choose from, but EarlyBird offers a unique blend of innovation and simplicity that you won’t find elsewhere.
  2. Open your account. EarlyBird makes it easier than ever to get your account set up.
  3. Decide how much to contribute. If you’re saving for your child or another important child in your life, you may decide to set up a monthly contribution to help create a sizable nest egg for their future.
  4. Invite friends and family to contribute. Once your account is set up, EarlyBird makes it easy to share it with friends and family and invite them to contribute.
  5. Leave lasting memories for your loved one. One of the standout features of EarlyBird is the ability to leave a video message for the child in your life. Not only will the financial gift mean a lot to them later on, but the memories feed will create a meaningful keepsake.


It’s never too early or too late to open an investment account to start saving for the young people in your life. 

While UGMA accounts and 529 plans both can be effective in preparing children for the future, an UGMA account offers a unique flexibility and ownership you can’t get elsewhere.

EarlyBird makes it easy to set up an UGMA account for your child and invite all of the child’s loved ones to contribute. 

They’ll love the opportunity to meaningfully contribute to their future. If you’re ready to start investing for the children in your life, download the EarlyBird app today.


This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.


EarlyBird Team

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Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.