Advisors weigh 529 plans and UTMA as college savings options

Financial advisers are urging parents to review 529 college savings plans and alternatives as the school year ends and 529 Day arrives on May 29. They point to tax-free growth and state tax breaks as reasons families use 529 accounts, while also noting contribution limits, state rules and other factors that can affect whether a plan is the best fit.

Section 529 plans are state-sponsored accounts that pay for a beneficiary’s qualified education costs, including higher education and certain K–12 expenses. Earnings grow tax free and distributions used for qualified education expenses are not taxable. Many states offer income tax deductions or credits for 529 contributions. Industry data show about 17.7 million 529 accounts held nearly $603 billion in assets as of Dec. 31, 2025.

One advantage of 529 plans is the absence of income limits that apply to some other tax-advantaged accounts. Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting, described 529s as “a wonderful thing” and highlighted their broad availability and tax treatment. Parents, grandparents and others can contribute to the same account, and the named beneficiary can be changed to another family member if funds are unused.

Contributions are subject to state-set caps and federal gift-tax rules. Under current federal rules, contributions count against the annual gift tax exclusion of $19,000 per donor per recipient. Industry guidance also notes some qualified uses are capped at $20,000 per year. Luscombe recommended that family members coordinate gifts so combined contributions do not exceed state or federal limits.

A federal law enacted in July 2025 expanded eligible K–12 expenses for 529 plans, reducing the risk of leftover balances that cannot be used for school costs. Account owners can also investigate rollovers to different state plans if they want different investment options. If a beneficiary develops a disability, funds may be moved to an ABLE account for individuals with disabilities.

Some families prefer custodial accounts under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act for greater spending flexibility. Frani Feit, senior wealth advisor at Advisors Capital Management in Ridgewood, New Jersey, said the idea that savers must use their home state’s 529 plan is incorrect and noted that many clients choose UTMA accounts because they allow spending on activities such as day camp and lessons. Custodial accounts make the child the legal owner while an adult acts as custodian, but unearned income above certain thresholds may be taxed at the parents’ marginal rate under the so-called kiddie tax.

Advisers also point to other tax benefits tied to education, including the American Opportunity Tax Credit, the Lifetime Learning Credit, a student loan interest deduction and tax breaks for savings bonds used for education. They advise families to discuss goals with a financial planner, coordinate contributions among relatives to avoid exceeding gift limits, review state plan rules and fees before choosing a 529, and consider rollovers or alternative account types if circumstances change.