I am looking to start a college savings fund for my daughter and am debating between the 529 and UGMA. I want to be able to save for her and if her grandparents pay for her college (very possible) or she decides to go in a different path I want to be able to give her this money I have saved for her.

Her mother and I are divorced and we have joint custody but her mother is the primary parent and claims her on her taxes. If I were to open a UGMA account and there were tax implications down the line which parent would be the one responsible for that? I don't want to put her mom in a bind when tax time comes around but I want to save for her future in the best way I can for college or for general living expenses if the money is not needed for college.


With a UTMA/UGMA account, the minor (child) is the legal owner of the account. Any income/proceeds from the account belong to the minor and at tax time the income goes on the minor’s tax return.*

Although the UTMA/UGMA account is owned by the minor, it is controlled by the custodian. When you set up the account, you name a custodian that has complete control over the account. Since you are funding the account, you would probably want to name yourself as the custodian. The custodian has the legal obligation to only make decisions for the benefit of the minor. You decide how it is invested, and you could spend the money on college for the minor, her housing, a car for her, whatever you like, but it has to be for her benefit. After she reaches the age of majority (varies by state from 18-25), she has complete control of the account and can spend it on anything she wants.

* Keep in mind that, depending on the size of the account, it may be many years before the child has actually earned enough in a year to be required to file a tax return.

  • Did you want to review the 529 option as well? – JTP - Apologise to Monica Feb 7 '18 at 2:56
  • @JoeTaxpayer I took the question to be about the UGMA (based on the title). I think the comment about the 529 was just background info. – Ben Miller - Reinstate Monica Feb 7 '18 at 4:04
  • Thanks Ben, I am starting to think a 529 might be the better option just in terms of simplicity. Worst case scenario I take the 10% penalty and just treat it as another investment vehicle that was slightly less profitable than other options. – user1723699 Feb 7 '18 at 15:09

The 529 offers certain flexibility the UTMA may not.

As Ben noted, depending on the state, the age of majority differs. Not knowing the child's age, we have no idea if she'll actually go to college (one extreme) or what it will cost (a full scholarship? Congrats!). Depending how you feel about having the money go to her if it doesn't go to tuition, the 529 offer you an escape hatch. You are the custodian, but you also have the legal right to change beneficiaries, even back to yourself, if things don't go the way you wanted.

The downside to this is that if the funds don't go to a school, the growth is taxed and a 10% penalty applies, again, just to growth.

If the 529 money is given to your daughter, but not used for school, the tax/penalty is still due, but it shouldn’t be a burden to the Ex or child as it can be paid from that account.

  • I am thinking the 529 might be the way to go just in terms of ease of use. I am not going to have more kids or go back to school myself but I could always just take the penalty hit if something happens where I don't need to pay for her college (hopefully for good reasons) and then I have more money than I expected even with the penalty. – user1723699 Feb 7 '18 at 15:17

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