College Education Savings Plans (Roth IRAs & UGMA/UTMA)

college students meeting

In the past decade, total U.S. student loan debt has surpassed credit card debt and auto loan debt combined1. Americans now owe more than $1.53 trillion in student loan debt and rising. Most students finance at least some of the cost by taking out student loans, with the goal of having their investment pay off with higher earnings down the road. But, in the meantime, repaying those student loans can be a significant hurdle, not only for graduates but the economy as a whole. Although the average student loan has a term of 10 years to be paid off, the repayment timetable for four-year degree holders takes an average of 19.7 years with an average loan payment of $393/month2.

This massive debt could be avoided by better planning. The key – as in most all types of investing – is to start as early as possible to let the compounding rates of return work to grow the account. There are many ways to save and invest for education, with some accounts offering more tax advantages than others.

Last month, we looked at the differences between 529 Plans and Education Savings Accounts (ESAs). If you missed Part 1, you can view it here. To better understand the differences between each potential college savings account, let’s take a look at a few more options – a Roth IRA and a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA) account.

Roth IRA

Children can get a financial head start by opening a Roth IRA once they begin earning income.  We have seen toddlers with advertising income, and we have seen young children employed at the family farm for instance. If they are under the age of 18, it will technically be considered a Custodial Roth IRA account, then after attaining age 18, it would change over to the child’s name.

Generally, Roth IRA distributions before age 59 ½ would be subject to a 10% penalty tax on the amount that the account has grown over its basis. The amount(s) originally invested are not subject to taxation. There are some exceptions to this rule that allow early withdrawals, and qualified education expenses is one of them. Roth IRAs can be distributed penalty tax-free as long as they do not exceed the cost of the qualified educational expense.


  • Fairly easy to get started at most brokerage firms and mutual fund companies.
  • Money grows tax-free.
  • Investment flexibility.
  • Money inside account is not counted as an asset for financial aid purposes.
  • If not used for college – then it could be used for retirement.


  • Few tax benefits compared to a 529 plan.
  • Roth IRA’s are subject to taxation if less than 5 years old (from 1st deposit).
  • Eligibility  for making contributions phases out once adjusted gross income (AGI) exceeds $137,000 (or $203,000 if you’re married and filing a joint return).
  • Each person can only contribute up to $5,500 per year ($6,500 if you’re 50+).
  • Early withdrawals are counted as an asset toward financial aid purposes.


Uniform Gift to Minors Accounts (UGMA) and Uniform Transfer to Minors Accounts (UTMA) are custodial accounts that adults can set up and gift or transfer assets to minor recipients. You can deposit almost any form of financial product in these accounts, such as cash, stocks or bonds. The account, both its principal and any investment return becomes the property of the recipient when the reach the age of majority, which is typically 18 to 21, depending on the state of residency.

UGMA and the UTMA are usually used interchangeably, but the two do have some distinctions. Custodial accounts set up under the newer UTMA can contain any kind of tangible or intangible asset, including real estate, works of art, and intellectual property. In contrast, UGMA accounts are limited to financial assets, such as cash, stocks, bonds, and insurance products. Once an asset is deposited or transferred into one of these accounts, it is considered an irrevocable gift.

All states permit UGMA accounts. Vermont and South Carolina currently do not allow UTMA accounts (as of March 2019).


  • No contribution limits (non-related adults can also contribute to the account at any time).
  • Dividends and capital gains are taxed at the child’s rate.
  • There are no use constraints and are not limited to educational purposes only.
  • UTMA law allows virtually any kind of asset, including real estate, to be transferred to a minor.


  • Income is taxed at the parent’s rate if it exceeds $2,100 per year.
  • Account is considered a student asset and assessed at a high rate (20%) – therefore having a significant impact toward financial aid purposes.
  • The child gains control of the account at age of majority. They may want a new car instead of a college education.


Considering a college savings account requires quite a bit of strategy regarding taxes, investments, generational wealth transfer, financial aid, and other areas of financial planning. There are a lot of rules regarding these two account types that are not discussed in the above synopsis. It is very important that you meet with a qualified financial planner to make sure you are maximizing the potential benefit.

If you really want to be smart about college planning, start saving for your child early and enlist the help of a pro. A good financial planner will look at where you are today and help you come up with a plan. Act now so you and your family are not adding on to the student loan statistics.

Contact us today by calling (509) 735-0484 or emailing


1FRBNY Consumer Credit Panel/Equifax. Consumer student loan debt compared to other nonhousing debt. Student loan landscape statistics in 2019.