College savings: 529 vs. UTMA
originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.
Q: Which produces a better rate of return: a 529 college funding plan or a mutual fund I could manage myself?
A: There is no reason to assume that either one would outperform the other to achieve a greater gross investment return. If it does happen, it would be by luck rather than by design. You probably mean to ask which will achieve a higher net (after tax) rate of return. This depends on your specific tax situation. In general higher net worth families will do better in the 529 plan while families with more modest accounts may do just as well or better simply by holding investment in “Uniform Gift to Minors” accounts. While 529 college funding plans can be a great deal for some people, there is no reason to lock your money away in one of these investment plans until there is clear indication that you will realize a tax benefit. Keep in mind that you lose some freedom and access to funds in a 529 plan, so the financial benefits must outweigh the burdens.
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