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Custodial Accounts UTMA/UGMA
Custodial UTMA/UGMA accounts are designed to provide more flexibility by allowing proceeds to be used for education expenses as well as other non-educational expenses as long as the money is used for the benefit of the child/minor. Proceeds can be invested in any type of investment, including stocks, bonds, mutual funds, real estate, etc., as long as it is done in the best interest of the minor. There are no income limits or contribution limits to UTMA/UGMA custodial accounts.
Although these custodial accounts do not provide the federal tax free withdrawal/ distribution options of a 529 Plan or Coverdell ESA plan, they do provide some tax benefits while the child is still a minor.
The advantages of the Custodial UTMA/UGMA accounts include the flexibility of investment options, the flexibility of how the proceeds may be used (more than just education) and some tax benefits until the minor reaches the age of majority (age 18 or 21 depending on the state). One drawback to the Custodial UTMA/UGMA accounts is that the proceeds must be used for the benefit of the minor and once the minor reaches the age of majority, the custodian (typically a parent) no longer maintains control of the proceeds and the minor may utilize the proceeds as they see fit. Please see this College Savings Comparison Chart to view the differences between a custodial UTMA/ UGMA plan and other children's savings options. Please also consult your tax professional for tax advice related to college and children savings plans.
