Fidelity 529 Account vs. Custodial: Which One Is Better for a Child?

Someone asks:

Does it make more sense to open an investment account and gift it to my daughter (she’s one right now) or open a 529? What are the pros of the 529 vs a custodial UTMA investment account?


Daniel W:

We have an taxable account in our own names that we put $200 in every month that is designated for the child. This way it can be used for anything, and just in case they aren’t very responsible at 18yo we can hold it and make sure it is spent wisely like college, a wedding, a down payment on their first house, etc

Justin H:

I opened taxable accounts for each of my kids and add to it as often as I can. Both are 100% VOO. I didn’t like the fact of the 529 being limited to only education as this will be a gift to them at 18 to decide whether to continue investing or not. I’m teaching them about wealth building and investing along the way and have high hopes they’ll continue once gifted to them.

Henry S:

So the reason 529 plans are better is because of the tax advantages as all growth and withdrawals are tax free if it’s for school. Also depending on your state part of your contributions are deductible as an incentive. In IN we get 20%.

Illinois 529 contributions to the state sponsored plan reduce IL taxable income by 10k (20k if married). Has worked great and the revamp of the state sponsored plan in 2017 was successful. I’ve got an account for each of my 7 kids and the lifetime ROR has been 30-35% since 2017.

Matthew W:

It depends if she’ll go to college. If she’ll go to college, 529 is good. And/or, gift her your appreciated shares, which will end up in her UTMA account. Then sell from her account. This helps avoid taxes. For the future, keep stuff in your taxable account and gift her the appreciated shares. If the stock drops, then you sell for a loss from your account.

Chad T:

529 pros – some tax benefits (specifics vary by state). Less impact to FAFSA than UTMA. You can change beneficiaries if they don’t have college expenses.

Brokerage account pros – can be used for non educational purchases without penalty. If still in your name, less impact to FAFSA than UTMA. You can hang on to it if they aren’t responsible.

Armando C:

You can open both. I believe they are complementary rather than competitors. 529 belongs to you and is tax free growth. UTMA belongs to the kid and is tax a the kid’s rate. While I did a large lump sum to the 529 when my kid was born, I wouldn’t do that to an UTMA since the kid may not be mature enough when you lose custodial control. Imagine waking up in your 18yr birthday and all of the sudden, you have a large amount of money and no one can legally prevent you to blow it up with your 1 week boyfriend or girlfriend instead of going to college or buying a house? Hell no!

Mylien M:

In general, it is best to accumulate assets/savings in the parents’ names, OR in 529s, and not child’s name (student assets). One of the reason is should your family situation change he/she may need to apply apply for aid for college, the assets held in their names dings them more than assets held in the parent’s name.

Tony D:

Contrary to conventional wisdom, we opened a ROTH in my wife’s name and funding it with the intention of using it for my 1 yo daughter’s college. If she doesn’t go to college or doesn’t need it, then it just sits there for our retirement.

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Diego, a seasoned financial analyst in New York, brings a decade of expertise to guiding financial decisions. As a blogger for, he simplifies finance, offering insights on Fidelity Investments. Beyond numbers, he explores NYC's culture and enjoys capturing moments through his photography.

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