Saving for your child’s college education is one of the most important financial goals you can set early on as a parent. But frequent moves, deployments, and the unpredictability of military life can make it difficult for military families to maintain a consistent savings plan. Fortunately, there are several options available to help you build college savings, including 529 Plans, UGMA accounts, and UTMA accounts. 

529 Plans 

A 529 Plan is one of the most popular ways for families to save for education. These state-sponsored plans allow you to save for qualified education expenses, including tuition, room and board, and other related costs. The money you put into a 529 Plan grows tax-deferred, and withdrawals for qualified expenses are tax-free. 

What makes 529 Plans especially attractive for military families? 

• Military families can choose a 529 Plan from any participating state, which offers flexibility in case of PCS moves. 
• Unlike prepaid tuition plans, 529 Plans can be used at schools in different states without the need to change the plan. 
• A 529 Plan can supplement military education benefits (e.g., GI Bill), covering additional costs such as private or out-of-state tuition.  

Limitations to Consider 

• Prepaid tuition plans are not transferable between states or institutions, even with a PCS or military orders. 
• 529 Plans are limited to qualified education expenses, and withdrawing funds for non-educational purposes incurs taxes and penalties. 

UGMA Accounts 

A Uniform Gifts to Minors Act (UGMA) account allows you to transfer assets to a minor child that can be used for a wide variety of purposes, including college expenses. Unlike a 529 Plan, there are no restrictions on how the money can be spent, making UGMA accounts more flexible. This can be a great option for families who want to give their children a broader range of financial resources. 

What makes UGMA accounts beneficial for military families? 

• UGMA accounts stay with the child regardless of military relocations, offering flexibility for families on the move. 
• Funds can be used for a variety of purposes, not just college expenses.  

Limitations to Consider 

• When your child reaches the age of majority, they get control of the account and can spend the assets how they see fit. 
• Earnings are taxable, and the child may need to pay taxes on the earnings. 

UTMA Accounts 

The Uniform Transfers to Minors Act (UTMA) account is like the UGMA, but with even greater flexibility. In addition to cash, UTMA accounts can hold a broader range of assets, including real estate, patents, and other types of property. This can make UTMA accounts an appealing option for families who want to set aside more than just money for their child’s future. 

How do UTMA accounts benefit military families? 

• UTMA accounts are not affected by frequent relocations, and the assets stay with the child. 
• The account can hold a variety of assets, offering greater potential for growth. 

Limitations to Consider 

• As with UGMA accounts, when your child reaches the age of majority, they get control of the account.  
• Earnings may be taxed, and the assets may affect the child’s eligibility for financial aid. 

Comparing 529 Plans, UGMA, and UTMA Accounts 

Each of these college savings options has distinct benefits and limitations. Here’s a quick comparison: 

529 Plans are designed specifically for education savings, offering tax advantages and flexibility for military families. They allow you to save for a wide range of education expenses but are limited to qualified expenses. Non-educational withdrawals incur taxes and penalties, and prepaid tuition plans are not transferable across states with a PCS. 

UGMA Accounts offer broader flexibility, as funds can be used for any purpose, not just education. However, they come with the risk that, when your child gains control of the funds at the age of majority they are not spent on education. Additionally, the assets may affect financial aid eligibility, and earnings are taxable. 

UTMA Accounts provide the greatest asset flexibility, including real estate and other property, in addition to cash. Like UGMA accounts, they may affect financial aid eligibility and tax the earnings, but they can be useful if you're looking to set aside diverse assets for your child’s future. 

Which Strategy Is Right for Your Family? 

Choosing the best college savings strategy depends on your family's unique situation. It’s important to consider how each option aligns with your long-term financial goals, including the impact of tax benefits, financial aid, and how easily you can manage your savings while on the move.  

If you want a tax-advantaged account specifically for education expenses, a 529 Plan is likely the best option. If you prefer flexibility in how the funds are used and are not concerned with tax implications, an UGMA or UTMA account might be a better fit. 

For help choosing a life insurance policy that will help provide your family with the right amount of financial security for now and the future, contact an AAFMAA Member Representative at 877-398-2263 to discuss your options. 

---

This article was originally published March 4, 2022.