Five ways to save for a child's education

529 plans, Trump Accounts, Coverdell ESAs, custodial Roth IRAs and UTMA/UGMA accounts, compared on the same five questions: how money gets in, who controls it, what it costs to take money out, what happens to what's left, and how it affects financial aid. Figures are for tax year 2026 and the 2027–28 aid year.

ImpactAdvisor LLC is an independent, fee-only fiduciary RIA in San Francisco. This is general information, simplified; check with your CPA or financial professional before acting.

All five accounts, side by side

Five ways to save for a child's education, compared on five questions.
Account	Money in	Control	Taking it out	Left over	Aid	Tax while it grows	Income limit on whoever gives
529 plan	Anyone, no yearly cap	The owner (a parent), permanently	Nothing, for education	Switch to another family member	Parent's, up to 5.64%	Not taxed.	None. Anyone can contribute at any income.
Trump Account	$5,000 a year per child, all givers	Locked until 18	Tax on all but family deposits, even for tuition	Becomes a traditional IRA	No guidance yet	Not taxed.	None.
Coverdell ESA	$2,000 a year per child, all givers	The parent, until used	Nothing, for education	Use or move by 30	Parent's, up to 5.64%	Not taxed.	Yes — the only one. $95,000–$110,000 single, $190,000–$220,000 joint, tested on whoever gives.
Custodial Roth IRA	Up to the child's pay	The child's; managed to 18–21	Deposits free; growth taxed	Keeps growing for retirement	Balance not counted; withdrawals count as income	Not taxed.	The child's pay is the limit. No one else's income matters.
UTMA / UGMA	No limit	The child's, permanently	No rules; taxed every year	Theirs outright	Child's, 20%	Taxed every year. The child's first $1,350 of investment income is untaxed, the next $1,350 is taxed at the child's rate, and above $2,700 at the parents'.	None.

Who each account is for

529 plan: Saving steadily for a degree they expect

Maya and Devin, Chicago. Their daughter is 4. They can put away $1,000 a month.

Why: In a 529, growth is never taxed when it pays for education, at any balance, and aid formulas count it lightly.

Limit: Money that doesn't go to education pays income tax plus 10% on the growth.

Maya and Devin's numbers: $168,000 over 14 years

Fourteen years at $12,000 a year is $168,000 of deposits before any growth.

Why not the others. A Coverdell would cap them at $2,000 a year. Their daughter has no job, so no Roth. A Trump Account caps them at $5,000 and taxes the growth on the way out. A UTMA in an index fund would be taxed at their rate once it passed about $200,000, and it would count heavily against aid.

Also check your state. Illinois gives a state income tax deduction for contributing to its own plan. Many states do, with different rules.

If she doesn't need it all, they can switch the account to a sibling, a cousin or themselves. Moving it into her own Roth IRA later is possible but limited — see question 4.

Sources: 26 U.S.C. §529 · IRS Topic 313 (529 plans) · IRS Pub. 970 · Savingforcollege: 529 limits by state (practitioner)

Trump Account: A newborn, and a family that can save a little

Camila and Andre, Phoenix. Mateo was born in March 2026. They can save about $150 a month.

Why: The government adds $1,000 for children born 2025–2028. A parent has to claim it, on Form 4547.

Limit: Nothing comes out until the year he turns 18. Then it becomes a traditional IRA, and the growth and the government's $1,000 are taxed when withdrawn.

Camila and Andre's numbers, and what's settled

Their $1,800 a year is well under the $5,000 cap. Andre's employer can add up to $2,500 a year, but that counts toward the same $5,000.

Their own deposits were made with already-taxed money and come back out untaxed. The $1,000, any employer money and all the growth are taxed as income when withdrawn.

They can open a 529 alongside it, now or later. The $1,000 is the reason to start here.

What's settled: accounts have been open since July 4, 2026. What isn't: the detailed rules were proposed in March and August 2026 and could still change.

Sources: 26 U.S.C. §530A · IRS: the $1,000 pilot contribution · Proposed employer-contribution rules (Aug. 2026) · Proposed Trump Account rules (Mar. 2026) · IRS Notice 2025-68

Coverdell ESA: Paying for private school now, and choosing their own investments

Priya and Tom, New Jersey. Their son is in 6th grade at a $9,500 school. They save about $2,000 a year and want to pick the exact funds.

Why: It can hold any stock or fund, like an ordinary brokerage account. A 529 limits you to the state plan's menu.

Limit: $2,000 a year per child from everyone combined, and it has to be used or moved by age 30.

Priya and Tom's case, and why it's the narrowest

Since 2026 a 529 can pay up to $20,000 a year of K-12 costs — tuition, tutoring, books, test fees — so the Coverdell's remaining advantage is investment choice.

Their income is under the $190,000–$220,000 joint limit, so they can contribute. A family over the limit can have a grandparent contribute instead: the test applies to whoever gives.

Contributions stop at 18. Before 30, the balance can roll into a 529 for the same child, which has no age limit.

Sources: 26 U.S.C. §530 · IRS Topic 310 (Coverdell) · P.L. 119-21 (2025) · IRS: 529 plan Q&A

Custodial Roth IRA: A teenager with a paycheck

Sofia, 16, Austin. She earns $6,200 at her aunt's bakery this year.

Why: Her deposits can come out any time, tax-free, and aid formulas don't count the balance.

Limit: Deposits can't exceed what she earned that year, and a missed year can't be made up.

Sofia's numbers, and what's taxed later

Her parents can put in the $6,200 for her so she keeps her pay. The limit is her earnings (and $7,500 in 2026), not whose money goes in.

Earnings mean pay for work actually done. Babysitting or yard work counts, with a record of dates, hours and who paid.

Growth taken out before 59½ is taxed — and while she's a full-time student under 24 who doesn't earn half her own support, investment income above $2,700 is taxed at the parents' rate. Using it for college removes the 10% penalty on that growth, not the tax.

Many families pair this with a 529.

Sources: 26 U.S.C. §408A · IRS Pub. 590-A · IRS: 2026 IRA limit $7,500 · IRS Pub. 590-B (withdrawal order) · Form 5329 instructions (penalty exceptions)

UTMA / UGMA: Money the child can use for anything, taxed lightly

Elena and Marcus, Seattle, high income. Their daughter Ingrid is 10. They want to set aside $150,000 that might go to college, a business or a home.

Why: The only account with no rules on what the money is for. In an index fund, an account this size pays little or no yearly tax, because a child's first $2,700 of investment income is taxed lightly.

Limit: The gift can't be taken back. Ingrid controls it at 21, and it counts heavily against aid.

Elena and Marcus's numbers, and the tax-free tiers

If the fund pays 1.3% a year in dividends, $150,000 pays about $1,950 a year. The first $1,350 is untaxed. The other $600 falls in the second tier, where fund dividends are taxed at Ingrid's rate — 0%.

Putting in $150,000 is a gift above the $19,000-a-year allowance, so they file a gift tax form. No tax is due unless either one's lifetime gifts pass $15 million. Unlike a 529, a UTMA has no five-year option.

Washington hands a UTMA over at 21 by default. The donor can choose up to 25, but only when the account is opened — and choosing past 21 can mean the gift no longer counts toward the $19,000 yearly allowance. See the pro tips.

How much of a child's investment income is tax-free?

Child's investment income, 2026	Tax
First $1,350	None. Covered by the child's standard deduction.
Next $1,350	The child's own rate: 0% on most fund dividends and long-term gains, 10% on interest.
Above $2,700	The parents' rate. Dividends and gains keep their lower capital-gains rate, usually 15%.

So the second $1,350 isn't exempt, but for an index fund it often comes to $0.

Filing. The child files a return once investment income passes $1,350. Parents can report it on their own return instead (Form 8814, if it's under $13,500), but then the second tier is taxed at 10% — even dividends that would have been 0% on the child's own return.

A job changes it. The standard deduction covers wages first. A child who earns $6,000 has only $450 of investment income left untaxed, not $1,350.

Who it applies to: children under 18; and 18-year-olds and full-time students under 24, unless their own earnings pay more than half their support.

How big can the account get before tax goes up? It depends on what it holds:

Investment (yearly payout assumed)	Tax-free $1,350 used up at	Parents' rate starts at
US stock index fund (1.3%)	≈ $104,000	≈ $208,000
Dividend fund (2%)	≈ $67,500	≈ $135,000
Money market (4.3%)	≈ $31,000	≈ $63,000

Selling investments creates gains that count too, so one large sale can cross $2,700 in a year the dividends alone wouldn't.

Sources: Rev. Proc. 2025-32 · IRS Topic 553 (kiddie tax) · Form 8615 instructions · Form 8814 instructions · IRS Pub. 501

Sources: 26 U.S.C. §2503 · Form 709 instructions · Washington UTMA, RCW 11.114 · Greenleaf Trust on UTMA gifts (practitioner)

Most families use more than one. A 529 for college plus a custodial Roth once a child has a job is a common pair.

Five questions

How does money get in? Who can contribute, and how much.
Who controls it? Whose money it legally is, and when the child takes over.
What does it cost to take money out? Tax, penalties, and who pays them.
What happens to what's left? If the child doesn't go, or doesn't need it all.
How does it affect financial aid? How much of it the aid formula counts.

No account is best at all five:

529 plan: Strong on all five when the money pays for education. Costly when it doesn't.
Trump Account: Easy to start, with $1,000 from the government for children born 2025–2028. Locked until 18; growth, the $1,000 and employer money are taxed when they come out.
Coverdell ESA: Free to spend on school from kindergarten on. Only $2,000 a year, and it must be used by 30.
Custodial Roth IRA: Hardest to fund — the child needs a job. Deposits come out free, and aid formulas ignore the balance.
UTMA / UGMA: Easiest to fund and to spend. The child owns it outright, and it counts most against aid.

Question 1: How does money get in?

Some limits are per person giving. Others are per child, shared by everyone.

529 plan: Anyone, with no yearly cap. The plan stops taking deposits once the balance reaches its ceiling — roughly $235,000 to more than $550,000, depending on the state.
Trump Account: $5,000 a year per child, from everyone combined — including up to $2,500 from a parent's employer. The government's $1,000 doesn't count toward it.
Coverdell ESA: $2,000 a year per child, from everyone combined. Each giver's income must be under a limit. Money over $2,000 is taxed 6% a year until it's taken out.
Custodial Roth IRA: Up to what the child earned from work that year, and no more than $7,500. Anyone can supply the money.
UTMA / UGMA: No limit. Above $19,000 per giver per year, the giver files a gift tax form.

Sources: 26 U.S.C. §529 · Savingforcollege: 529 limits by state (practitioner) · 26 U.S.C. §530A · Proposed employer-contribution rules (Aug. 2026) · 26 U.S.C. §530 · IRS Topic 310 (Coverdell) · IRS: 2026 IRA limit $7,500 · IRS Pub. 590-A · 26 U.S.C. §2503 · Rev. Proc. 2025-32

Turn on grandparents: the 529 and UTMA bars double, and the Coverdell and Trump bars don't move. Those two limits are per child. The bottom bar has no end because tuition paid straight to the school has no limit.

Parents and grandparents

A grandparent can give as much as a parent: $19,000 a year each, per grandchild. The differences are below.

A grandparent's 529 doesn't show up on the FAFSA

Not as an asset, and since the 2024–25 form, not when money comes out either. CSS Profile schools may count money when it's withdrawn. More under question 5.

Sources: 2027–28 SAI Guide · FSA Handbook, SAI chapter · CSS Profile

The Coverdell income limit tests the giver

$95,000–$110,000 single, $190,000–$220,000 joint. A grandparent under the limit can contribute when the parents can't. The $2,000 is still shared.

Sources: 26 U.S.C. §530 · IRS Pub. 970

Gifts to a grandchild can bring in generation-skipping tax

Usually nothing is owed: each grandparent has a $15 million generation-skipping exemption. But a large 529 gift using the five-year option has to be chosen on a gift tax form, and for generation-skipping purposes it counts as five yearly gifts.

Tuition paid straight to the school is free of both gift tax and generation-skipping tax. A grandparent's unused generation-skipping exemption doesn't pass to their spouse at death.

Sources: 26 U.S.C. §2613 (skip person) · 26 U.S.C. §2642 · 26 U.S.C. §2503 · Form 709 instructions · Rev. Proc. 2025-32

If a grandparent dies during a five-year 529 gift

The years not yet reached count in their estate. Example: $95,000 given at once, death in year three — $38,000 counts in the estate.

Sources: 26 U.S.C. §529

Name a successor owner on a grandparent's 529

Without one, the account can go through probate, the court process for settling an estate. The choice matters for aid: naming the parent — or the student, if the student is a dependent — makes it a parent asset on the FAFSA.

Sources: 26 U.S.C. §529 · FSA Handbook, SAI chapter

Medicaid: gifts can delay long-term care coverage

Gifts made in the five years before applying for Medicaid long-term care can delay eligibility. The $19,000 gift tax allowance doesn't protect them. A 529 the grandparent still owns may count as the grandparent's asset. California looks back over a shorter period, and its rule is changing.

Sources: 42 U.S.C. §1396p(c) (Medicaid look-back)

Don't be the custodian of a UTMA you funded

If the person who funded a UTMA is also its custodian and dies before the child takes over, it counts in their estate. Name someone other than the giver as custodian — for a grandparent's gift, usually a parent.

Sources: Rev. Rul. 59-357 · 26 U.S.C. §2038 · The Tax Adviser: gifts to minors

Who gets a state tax deduction depends on the state

Some states give the 529 deduction to anyone who contributes; others only to the account owner. In an owner-only state, a grandparent can open their own 529 for the grandchild.

Sources: none gathered yet — state rules were not researched.

Trump Account: who can open it (unsettled)

Anyone can contribute. Whether a grandparent can open the account ahead of the parents depends on the proposed rules, and sources disagree.

Sources: Proposed Trump Account rules (Mar. 2026)

Giving more than $19,000 a year

Going over the annual allowance doesn't create a tax bill. It means filing a gift tax form, and tax only starts after $15 million of lifetime giving.

Three ways to give more: each person has their own allowance; a 529 lets each giver use five years' worth at once ($95,000), which you choose on a gift tax form; and tuition paid straight to the school doesn't count as a gift at all.

Sources: 26 U.S.C. §2503 · Form 709 instructions · Rev. Proc. 2025-32 · 26 U.S.C. §529

Question 2: Who controls it?

529 plan: The account owner — usually a parent — permanently. The child is the beneficiary and has no legal claim. The owner can change the beneficiary or take the money back.
Trump Account: No one can take money out until January of the year the child turns 18. Then it's the child's.
Coverdell ESA: The parent, until it's used — by age 30 at the latest.
Custodial Roth IRA: The child's. A parent manages it until the state's hand-over age, usually 18 or 21.
UTMA / UGMA: The child's from the day it's funded. A custodian manages it until the hand-over age — usually 21 — and then the child can spend it on anything. The gift can't be taken back.

Sources: 26 U.S.C. §529 · UTMA §14 (Massachusetts text) · FinAid: UTMA ages by state (practitioner) · Nolo: all states now use UTMA (practitioner) · 26 U.S.C. §530 · IRS Form 5305-EA · IRS Notice 2025-68 · Savingforcollege: UTMA to 529 (practitioner)

Worth knowing: Moving a UTMA into a 529 doesn't give control back to the parent. The result is a custodial 529: the child still owns it, the beneficiary can't be changed, and it still hands over at the state's age. It does get the 529's tax treatment, but a 529 only takes cash, so the investments are sold first and the gain is taxed to the child.

Question 3: What does it cost to take money out?

A withdrawal can carry two charges: income tax on the growth, and a 10% penalty. The 529 and Coverdell drop both for education. Other exceptions, such as for a scholarship, drop only the penalty.

529 plan: Nothing, when spent on qualified costs — college, up to $20,000 a year of K-12, apprenticeships and some credential fees.
Trump Account: Income tax on the growth, the government's $1,000 and any employer money, even for tuition. The family's own deposits come back untaxed. Paying for college removes only the 10% penalty.
Coverdell ESA: Nothing, for school from kindergarten through college.
Custodial Roth IRA: Deposits come out first, and free. Growth taken before 59½ is taxed. For a full-time student under 24 who doesn't earn half their own support, investment income above $2,700 is taxed at the parents' rate.
UTMA / UGMA: No withdrawal rules. But it's the only one taxed every year while it grows, and selling investments to pay a bill creates a taxable gain in the child's name.

Sources: 26 U.S.C. §529 · P.L. 119-21 (2025) · IRS: 529 plan Q&A · 26 U.S.C. §72 · Form 5329 instructions (penalty exceptions) · IRS Notice 2025-68 · IRS Pub. 590-B (withdrawal order) · IRS Topic 553 (kiddie tax)

For illustration: a $20,000 account, half deposits and half growth. Trump and UTMA money is taxed as the student's income (the $1,350 tiers, then the parents' rate: 24% on income, 15% on gains). A 529 or Coverdell not spent on education is taxed to the parent at 24%.

Worth knowing: If the child wins a scholarship, a matching amount can come out of a 529 without the 10% penalty. Income tax on the growth is still due.

Question 4: What happens to what's left?

529 plan: Switch it to someone else in the family — a sibling, cousin, parent or future grandchild — with no deadline. Other options below.
Trump Account: In January of the year the child turns 18, it becomes a traditional IRA in the child's name — the pre-tax kind, like an IRA rolled over from an old 401(k), with one difference: the family's own deposits were already taxed, so they come back out untaxed. Everything else is taxed as income, with a 10% penalty before 59½ unless an exception, such as college, applies.
No. The family's own deposits were made with already-taxed money, so they aren't taxed again. Each withdrawal is part untaxed deposits and part taxable money — the government's $1,000, any employer money and all the growth — in proportion to what's in the account.

Paying for college is one exception to the 10% penalty. The income tax still applies.
Coverdell ESA: Use it or move it by 30. Rolling it into a 529 for the same child before then removes the deadline.
Custodial Roth IRA: They keep it, and it keeps growing as their retirement account.
UTMA / UGMA: It's theirs at the hand-over age, to use for anything.

Sources: 26 U.S.C. §529 · IRS Topic 313 (529 plans) · §529 as amended through 2023 · 26 U.S.C. §530 · IRS Notice 2025-68 · CRS report R48910

Worth knowing: Switching a 529 to a sibling or cousin is tax-free. Switching it to someone a generation younger than the current beneficiary, such as the beneficiary's own child, counts as a gift from the old beneficiary; two or more generations younger can also bring in generation-skipping tax.

Other options for a 529 that isn't needed

Change the beneficiary to a family member. No tax.
Pay student loans: up to $10,000 over the beneficiary's lifetime, plus up to $10,000 for each sibling.
Roll into the beneficiary's Roth IRA: up to $35,000 over a lifetime. The 529 must be at least 15 years old, money added in the last five years can't move, and each year is capped at the Roth limit and at what the beneficiary earned that year.
Take it out: income tax and 10% on the growth only. Deposits come back untaxed.

Sources: §529 as amended through 2023 · IRS Topic 313 (529 plans) · IRS Pub. 970

Question 5: How does it affect financial aid?

The FAFSA counts a parent's savings at up to 5.64% a year and a child's at 20%. The same money counts differently depending on whose name is on it.

529 plan: Counted as the parent's, at up to 5.64% — including a 529 the student owns, if the student is a dependent. A grandparent's 529 isn't counted.
Trump Account: Unknown for now. Retirement accounts are normally left out, but no rule yet says whether this one is. (unsettled)
Coverdell ESA: Counted as the parent's, like a 529.
Custodial Roth IRA: The balance isn't counted. Money taken out counts as the student's income on a later form, and income is counted more heavily than savings.
UTMA / UGMA: Counted as the child's, at 20% — the most of the five. Selling to pay tuition also adds income on a later form.

Sources: 2027–28 SAI Guide · FSA Handbook, SAI chapter · P.L. 110-84 (student-owned 529) · Savingforcollege: grandparent 529s and the new FAFSA (practitioner) · 2027–28 need-analysis tables

Every bar is the same length because it's the same money. The red is the amount added to the Student Aid Index.

Grandparent 529s: FAFSA and CSS Profile differ (unsettled)

A grandparent's 529 has never been reported as an asset on the FAFSA, and since the 2024–25 form, money taken from it isn't reported as the student's income. Before that, withdrawals could cut aid by up to half the amount.

The CSS Profile, used by a few hundred mostly private colleges for their own aid, may still count the withdrawals. Sources disagree on whether it asks about the balance. If a student is applying to Profile schools, check each school's rules before drawing on a grandparent's 529.

Sources: Savingforcollege: grandparent 529s and the new FAFSA (practitioner) · FSA Handbook, SAI chapter · CSS Profile

What this chart doesn't show

It only looks at savings. It asks nothing about income, household size or how many children are in college.

Income matters more than savings: a $10,000 raise costs about as much aid as $55,000 to $65,000 of extra savings, and most families earn far more each year than they have saved. One allowance in the full formula uses the lower-earning parent's income, not both parents' combined. For a full estimate, use the government's own Federal Student Aid Estimator.

Sources: FSA Handbook, SAI chapter · 2027–28 need-analysis tables

How hard is it to spend the money?

Most mistakes happen when money comes out. These four are the most common:

1. Take the money out in the same calendar year you pay the bill

The usual mistake is spring tuition billed in December and paid in January, with the withdrawal in the other year. Pay and withdraw in December, or pay and withdraw in January.

Money withdrawn in the December after graduation, with no costs left that year, is taxable.

Sources: IRS Pub. 970 · Form 1099-Q instructions

2. Don't use the same tuition for a tax credit and a tax-free withdrawal

The American Opportunity Tax Credit is worth up to $2,500 a year for four years, based on the first $4,000 of costs. Those dollars can't also be covered tax-free by a 529.

If your income qualifies — it shrinks to zero between $80,000 and $90,000 single, $160,000 and $180,000 joint — pay $4,000 from other money and use the 529 for the rest.

Sources: IRS: American Opportunity Tax Credit · IRS: education credits · IRS Pub. 970

3. Room and board is capped at the school's allowance

It's covered only for students enrolled at least half time, and only up to the room-and-board figure in the school's cost of attendance for the student's living arrangement — or the actual charge for school-owned housing. Off-campus rent above the allowance isn't covered. The financial aid office has the number.

Sources: IRS Pub. 970

4. Whoever receives the money has to show what it paid for

The 1099-Q goes to the student if the plan pays the school or the student, and to the owner if it pays the owner. Nothing reports what the money was for, so keep bills, receipts, the school's allowance and your own worksheet, by tax year.

Sources: Form 1099-Q instructions · IRS Pub. 970

What isn't covered, though people assume it is

Travel to and from school, health insurance and student health fees (even when they're on the school's bill), a car, college application fees, and club or Greek-life dues. A computer is covered if the student mainly uses it while enrolled.

Sources: IRS Pub. 970 · IRS: 529 plan Q&A · P.L. 119-21 (2025)

If the school refunds tuition, put it back in a 529 within 60 days

If the school refunds tuition a 529 paid, put the money back into a 529 for the same child within 60 days of the refund, or it becomes taxable.

Sources: IRS Pub. 970 · 26 U.S.C. §529

Some states take back the deduction for K-12, loan or Roth-rollover withdrawals

States that give a deduction for 529 contributions can take it back if the money is used for something the state doesn't count. Some states don't count K-12 costs, student loans or Roth rollovers, even though federal law does.

Sources: none gathered yet — state rules were not researched.

How to get the money out, account by account

529: the owner asks the plan to pay the school, the student or the owner. Allow one to two weeks.

Coverdell: works like a 529, and must be used or moved by 30.

Custodial Roth: deposits can come out any time. Growth is taxed.

Trump Account: nothing comes out before the year the child turns 18.

UTMA: no paperwork rules, but it's the child's money. See the next section.

Sources: IRS Pub. 970 · IRS Pub. 590-B (withdrawal order) · IRS Notice 2025-68

Can a parent pay tuition from a UTMA?

Yes. The custodian can spend UTMA money on anything for the child's benefit, including tuition, and can pay the school directly. There's no list of approved costs and no penalty. Four things to check first:

Sources: UTMA §14 (Massachusetts text) · UTMA §14 (North Carolina text)

1. Not for a bill you already owe, such as tuition a divorce decree makes you pay

State law says spending from a UTMA is in addition to, not instead of, a parent's duty to support the child. If a divorce decree or settlement already requires you to pay tuition, paying it from the child's account uses their money for your obligation, and the child can later sue to get it back.

For income tax, money used to meet a parent's legal support obligation can be taxed to the parent. Most states don't treat college as part of that obligation for married parents. New Jersey is the main exception, and a number of states, including Illinois, Connecticut, Massachusetts, New York and Washington, can order college support after a divorce. Pennsylvania briefly did; its supreme court struck that down in 1995.

Sources: UTMA §14 (Massachusetts text) · Sutliff v. Sutliff (Pa. 1987) · Treas. Reg. §1.677(b)-1 · Newburgh v. Arrigo (N.J. 1982) · Braun v. Commissioner (T.C. 1984) · Curtis v. Kline (Pa. 1995)

2. Be careful who signs the school's payment agreement (unsettled)

In at least one federal case, a parent who personally signed a school's financial agreement was taxed on trust income used to pay it, because the payment met the parent's own contract. If a UTMA is paying, put the bill in the child's name where the school allows. Sources disagree on how far this reaches.

Sources: Morrill v. United States (D. Me. 1964)

3. Selling investments to pay creates a gain in the child's name

The gain is the child's investment income, so the kiddie tax applies — the parents' rate above $2,700 for a full-time student under 24. Example: selling an $80,000 UTMA with $50,000 of gain costs about $7,100 at a 15% capital-gains rate.

On the FAFSA, the gain shows up as the student's income on a later form. Selling everything in one year usually costs less in aid than selling a slice every year, because the balance is counted at 20% every year it's held, while the gain is counted as income only once.

Sources: Form 8615 instructions · Rev. Proc. 2025-32 · 2027–28 SAI Guide

4. Paying from the UTMA can cost you the child as a dependent, and the tuition credit

If the UTMA pays more than half of the child's support in a year, the parents may not be able to claim the child as a dependent, or the education tax credit.

Sources: IRS Pub. 501 · IRS: American Opportunity Tax Credit

Everyday rules for a custodian

Keep the account separate. Pay from the UTMA itself or a bank account in its name, not your own checking. Keep a note of what each payment was for.

Spend on extras rather than basics. College tuition, camps, lessons and a computer are common uses; private K-12 tuition depends on the state. Food, housing, clothing and routine medical or dental care, braces included, are what parents are generally expected to provide.

Sources: UTMA §12, keep property separate (North Carolina text) · AAML, Spending the Children's Money (practitioner) · Fairmark on proper expenditures (practitioner)

For a child with a disability, it counts against SSI and Medicaid

For a child with a disability, a UTMA counts as the child's own asset for SSI (Supplemental Security Income) and Medicaid.

Sources: SSA POMS SI 01120.205

Why each account exists

529 plan — tax status for programs states already ran (1996)

By the mid-1990s several states ran prepaid-tuition programs, and it was unclear how they'd be taxed. The Small Business Job Protection Act of 1996 gave them tax-exempt status. It approved state programs rather than creating a federal account, which is why there's no federal yearly limit, why there are more than 50 different plans, and why each state sets its own balance ceiling.

At first, growth was only tax-deferred: taxed when withdrawn, not each year. The 2001 tax act made education withdrawals tax-free from 2002, and the Pension Protection Act of 2006 made that permanent.

Changes since 1996

Year	Law	Change
1996	Small Business Job Protection Act	Created; growth tax-deferred
2001	2001 tax act (EGTRRA)	Education withdrawals tax-free from 2002
2006	Pension Protection Act	Made the 2001 change permanent
2015	PATH Act	Computers count
2017	Tax Cuts and Jobs Act	K-12 tuition, up to $10,000 a year
2019	SECURE Act	Apprenticeships; up to $10,000 of student loans
2022	SECURE 2.0	Rollover to the beneficiary's Roth IRA, up to $35,000
2025	P.L. 119-21	K-12 limit $20,000 from 2026; more K-12 costs; credential fees

Sources: P.L. 104-188 (1996) · P.L. 107-16 (2001) · Joint Committee on Taxation on the 2017 act · §529 as amended through 2023 · P.L. 119-21 (2025)

Sources: P.L. 104-188 (1996) · Senate report 104-281 · GAO report on state tuition programs, 1995 · P.L. 107-16 (2001)

Coverdell ESA — started as the "Education IRA" (1997)

The Taxpayer Relief Act of 1997 created it for college costs only, with a $500 yearly limit. In 2001 the limit rose to $2,000 and K-12 costs were added. It was renamed that year for Senator Paul Coverdell of Georgia, who had pushed for the K-12 change and died in 2000.

Because it was modeled on an IRA, it has start and end ages: contributions stop at 18, and the money must be used by 30. The $2,000 has never been adjusted for inflation.

Sources: P.L. 105-34 (1997) · P.L. 107-16 (2001) · P.L. 107-22 (Coverdell renaming)

Custodial Roth IRA — a retirement account with no minimum age (1997)

The Roth IRA was created by the Taxpayer Relief Act of 1997 and named for Senator William Roth of Delaware. It's a retirement account, and the law says nothing about children or college. It works for a child because there's no minimum age, only a requirement for earned income. Using it for college is a workaround, which is why the withdrawal rules are built around retirement.

Sources: P.L. 105-34 (1997) · CRS report RL34397 · 26 U.S.C. §408A

UTMA / UGMA — giving a child property without a trust (1956, 1986)

These are uniform laws written for states to adopt: the Uniform Gifts to Minors Act (1956) and the Uniform Transfers to Minors Act (1986). A child can't hold title to stock or sign for it, and a trust for a modest gift cost more than it was worth. These laws let an adult hold property for a child with a one-line registration.

That's why the gift is permanent, why it ends at a set age, and why there are no rules about education. It was never meant as a college account.

Sources: Nolo: all states now use UTMA (practitioner) · UTMA §14 (Massachusetts text)

Trump Account — a traditional IRA for children (2025)

Created on July 4, 2025, by P.L. 119-21, which added section 530A to the tax code. Legally it's a traditional IRA for a child under 18, with the government adding $1,000 for children born 2025–2028. Accounts opened on July 4, 2026. The detailed rules are still proposed and could change.

Sources: P.L. 119-21 (2025) · 26 U.S.C. §530A · IRS Notice 2025-68 · Proposed Trump Account rules (Mar. 2026)

Pro tips

California UTMA: set the hand-over age at 21 or younger

In California a UTMA passes to the child at 18 unless the transfer names a later age. For a gift you make during your life, the latest age you can name is 21. Age 25 is allowed only for property that arrives through a will, a trust or a power of appointment.

That limit also protects the gift-tax treatment. A gift to a custodianship that ends by 21 counts as a present gift, so it falls under your $19,000-a-year allowance: under that amount, no gift tax form, and nothing comes off your $15 million lifetime amount. If a custodianship runs past 21 — possible for lifetime gifts in some states, such as Washington, and in California only for will or trust transfers — gifts to it can be treated as future gifts that don't qualify for the allowance. Then every dollar goes on a gift tax form and counts against the lifetime amount.

If you want the money held longer than 21, a trust built for that purpose is the usual tool. Ask an estate lawyer.

Sources: Cal. Prob. Code §3920.5 · 26 U.S.C. §2503 · The Tax Adviser: gifts to minors · Greenleaf Trust on UTMA gifts (practitioner) · Kitces on UTMA and 529 gifts (practitioner) · Washington UTMA, RCW 11.114 · Form 709 instructions

Expecting a baby? Open the 529 in your own name first

A 529 beneficiary needs a Social Security number, so you can't name a child before birth. Open the account with yourself (or another relative) as beneficiary, start saving, and change the beneficiary to the baby once they have a number. Changing to a family member is tax-free.

One detail: moving the beneficiary from you to your child is treated as a gift from you to the child. Keep it under $19,000 for the year, or use the five-year option, and no gift tax is owed.

Sources: Savingforcollege: a 529 before the baby is born (practitioner) · 26 U.S.C. §529 · IRS Pub. 970

Keep a 529 in your own name as a family account

A 529 with you as owner and beneficiary can pay for your own courses, and you can switch it to a child, niece or nephew later with no deadline. It counts as a parent asset for aid, and in many states you get the state deduction in the year you contribute.

Sources: 26 U.S.C. §529 · IRS Topic 313 (529 plans) · IRS Pub. 970

Grandparents: own the 529, or pay tuition straight to the school

A 529 a grandparent owns doesn't appear on the FAFSA, going in or coming out. Tuition a grandparent pays directly to the school isn't a gift at all, in any amount, and is free of generation-skipping tax. It covers tuition only, not room or books.

Sources: Savingforcollege: grandparent 529s and the new FAFSA (practitioner) · 26 U.S.C. §2503 · 26 U.S.C. §2611(b)(1)

Move a UTMA into a custodial 529 before applying for aid

A UTMA counts at 20% on the FAFSA. The same money in a custodial 529 for a dependent student counts as a parent asset, at up to 5.64%. The catch: a 529 only takes cash, so the investments are sold first and the gain is taxed to the child. Spreading the sales over several years keeps more of the gain inside the child's first $2,700. The money still belongs to the child.

Sources: Savingforcollege: UTMA to 529 (practitioner) · P.L. 110-84 (student-owned 529) · IRS Topic 553 (kiddie tax)

Pay $4,000 of tuition from other money to get the full tax credit

If your income qualifies, the American Opportunity Tax Credit is worth up to $2,500 a year, based on the first $4,000 of costs. Pay that $4,000 from other money and use the 529 for the rest; the same dollars can't count for both.

Sources: IRS: American Opportunity Tax Credit · IRS Pub. 970

File the child's own return when the income is fund dividends

Reporting a child's investment income on your own return (Form 8814) taxes the second $1,350 at a flat 10%. On the child's own return, fund dividends in that slice are usually taxed at 0%. The saving is up to $135 a year.

Sources: Form 8814 instructions · Form 8615 instructions · Rev. Proc. 2025-32

Hold a UTMA in a broad index fund

Index funds pay out little each year, so an account can grow to about $200,000 before its income passes the $2,700 point where the parents' rate starts. The same money in a money-market fund passes it at about $63,000.

Sources: IRS Topic 553 (kiddie tax) · Rev. Proc. 2025-32

A teenager's job: fund a custodial Roth up to their pay

Parents or grandparents can put in up to what the teen earned that year (and no more than $7,500 in 2026), so the teen keeps their pay. Keep a record of the work: dates, hours, who paid.

Sources: IRS Pub. 590-A · 26 U.S.C. §408A

Born 2025–2028? Claim the government's $1,000

The Trump Account seed isn't automatic. A parent elects it on Form 4547.

Sources: IRS: the $1,000 pilot contribution

Name a successor owner on every 529

Without one the account can go through probate. For aid, naming the parent — or the student, if a dependent — keeps it a parent asset.

Sources: 26 U.S.C. §529 · FSA Handbook, SAI chapter

Using the five-year 529 option? File the gift tax form

The five-year option has to be chosen on a gift tax form (Form 709) for the year you give. Without it, the whole amount is a gift in that one year: only $19,000 is covered by the yearly allowance, and the rest is taken off your $15 million lifetime amount.

Example: $95,000 put in at once. With the option chosen, it counts as $19,000 a year for five years and nothing comes off the lifetime amount. Without it, $76,000 comes off the lifetime amount. No tax is due either way unless your lifetime gifts pass $15 million, and the form is required in both cases.

Sources: Form 709 instructions · 26 U.S.C. §529

Coverdell: roll it into a 529 before age 30

A Coverdell must be used by 30. Rolling it into a 529 for the same child removes the deadline.

Sources: 26 U.S.C. §530 · IRS Pub. 970

Withdraw in the same calendar year you pay

The withdrawal and the bill must fall in the same calendar year, or part of the withdrawal can become taxable.

Sources: IRS Pub. 970

Won a scholarship? Take out the same amount without the penalty

You can withdraw up to the scholarship amount from a 529 without the 10% penalty. Income tax on the growth still applies.

Sources: IRS Pub. 970 · Form 5329 instructions (penalty exceptions)

Don't be the custodian of a UTMA you funded

If the giver is also the custodian and dies before the child takes over, the account counts in the giver's estate. Name someone else as custodian.

Sources: Rev. Rul. 59-357 · The Tax Adviser: gifts to minors

Frequently asked questions

Can a parent pay college tuition from a UTMA account?

Yes. The custodian can spend UTMA money on anything for the child's benefit, including tuition, and can pay the school directly. There's no list of approved costs and no penalty. Check first that the bill isn't one you already owe (for example under a divorce decree), who signs the school's payment agreement, the capital gain created by selling investments, and whether the payment could cost you the child as a dependent.

How much of a child's investment income is tax-free in 2026?

The first $1,350 is untaxed. The next $1,350 is taxed at the child's own rate — 0% on most fund dividends and long-term gains, 10% on interest. Above $2,700, the parents' rate applies.

What does a Trump Account become at 18?

In January of the year the child turns 18, it becomes a traditional IRA in the child's name — the pre-tax kind, like an IRA rolled over from an old 401(k), with one difference: the family's own deposits were already taxed, so they come back out untaxed. Everything else is taxed as income, with a 10% penalty before 59½ unless an exception, such as college, applies.

Does a grandparent's 529 count on the FAFSA?

No. A grandparent-owned 529 isn't reported as an asset, and since the 2024–25 FAFSA its withdrawals aren't reported as student income. CSS Profile schools may still count the withdrawals.