UTMA vs. 529

[texastumbleweed]

A while back I started an UTMA for my daughter thinking that I'd get better returns than the 529's.  I'm about to open two more for my younger children, but I realized when I asked a question about how much people put into their kid's college funds, no one mentioned UTMA's.  Are there some reasons I am missing that I should open a 529 instead of an UTMA?
thanks

[GizmoTX]

Control -- you don't want an 18 yo taking ownership of a UTMA stash. See this article for more reasons for making the UTMA go away: https://www.forbes.com/sites/baldwin/2013/02/28/using-utma-and-ugma-accounts-for-college/#6dfa33262c73

I believe a 529 offers some tax advantages plus it can be used for more than one child. However, it is limited to educational use without penalty. We didn't use a 529 because it didn't exist at the time.. We chose to set up & fund an irrevocable trust; while it is subject to tax, this is much lower than our personal return, & as trustees we chose tax advantaged investments.

[seattlecyclone]

The main differences, as I see them:

• Control. Money in a 529 remains under your control. Spend it on your kid's education, or transfer it to another relative, or withdraw it for whatever you like. Up to you. Money in an UTMA becomes your kid's unrestricted property at age 18 or 21 (depending on state). You can hope that the kid you raised would respect your wishes on what to do with the money (and they probably will!), but at the end of the day if they want to withdraw the money, fly to Vegas, and bet it on red...well, that's always a possibility and there's nobody at the brokerage firm or the airline or the casino who has the power to put a stop to it.
• Taxation: Money in a 529 is never taxed again as long as it is withdrawn for recognized educational expenses. Otherwise the gains count as regular income plus a 10% penalty (though the penalty can be avoided in certain circumstances). With an UTMA it's basically just a taxable brokerage account for your kid. The first $2,000 or so of dividend and capital gain income is generally tax-free for a minor with no other income, so it can be a nice little tax shelter to funnel some of your kid's expenses through while they're growing up. But if you build up a significant amount of gains in there it can lead to a real tax bill for your kid in a way a 529 (when used for education) would not.
• Financial aid: A 529 is generally assessed as the parent's property on the FAFSA. An UTMA is assessed as the kid's property. The formulas generally ask for kid's property to be contributed at a higher percentage than parent's property.
• Flexibility: A 529 is tax-free when used for education (great!) but taxed at a higher level than a regular brokerage account when used for anything else (not great!). An UTMA is taxed just like a regular brokerage account no matter what the money is used for.

In the end this is a very personal decision. If you're relatively certain that the money will be needed for college, I think the edge belongs to the 529. If you're not so sure about college or whether the whole amount will be needed for it, and you believe you can trust your kid to respect your advice on what to do with the money, then an UTMA can be a fine choice.

A while back I started an UTMA for my daughter thinking that I'd get better returns than the 529's.  I'm about to open two more for my younger children, but I realized when I asked a question about how much people put into their kid's college funds, no one mentioned UTMA's.  Are there some reasons I am missing that I should open a 529 instead of an UTMA?

This bolded bit is a red flag to me. There's nothing magical about either type of account that should cause the investments in one to perform better than the other. Were you trying to pick stocks and beat the market with your UTMA, or what else caused you to believe the returns would be better?

[Acorns]

We are going with a 529 for our kids on the assumption that at least one of them will have educational related expenses in the future. Also, in the case of one or more of them getting a scholarship, 529 money can be withdrawn without penalty up to the amount of that scholarship, although you do have to pay income tax on the gains.

[texastumbleweed]

Yes, I was thinking I could get better gains!  The 529's seemed to be getting 5% when I looked at the funds available. 

Also, do you open a 529 for each child?

[seattlecyclone]

Yes, I was thinking I could get better gains!  The 529's seemed to be getting 5% when I looked at the funds available. 

The 529s just invest in stock and bond funds, same as any other account. What makes you believe that you would get a better return elsewhere?

Also, do you open a 529 for each child?

Sure, might as well. These accounts have a single beneficiary. You can always transfer balances between family members as needed, but you might as well start off assigning the money to each kid so you're less likely to need to change it later.

[High Income Parent]

Yes, I was thinking I could get better gains!  The 529's seemed to be getting 5% when I looked at the funds available. 

Also, do you open a 529 for each child?

You can choose a host of options for your 529 accounts. The have a variety of stock and bond funds.  529's are just like any other investment. You want low cost to get the best returns.  You have your choice of every state (Utah is the cheapest if you don't get a tax break in your state, (and I assume you live in Texas like myself). 
As for how you want to handle the accounts, there are a million different choices, but what I think it all boils down to is how much you want to have control of your money, vs the tax savings. 

The profits for a 529 are tax free if used for education but they have to be used for education. If your kid doesn't need the money (scholarship) or use the money (doesn't go to higher education) then you have somewhat less usable money.  You can transfer to another student (still tax free) or use the money for regular spending in retirement, but you pay regular income tax plus a 10% penalty on the gains.  Also the gains have to be taken out pro-rata meaning you pay tax at the percentage of gain to principal.  You can't just take out the principal like a RothIRA. 
As for opening a 529 account for each kid, that is not necessary. You just need to have an account for the student you are taking out education related expenses.