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Published: Mar 17, 2021 11 min read
Two baseball caps upside down, one fills with cash and one without.
Kiersten Essenpreis for Money

When Ksenia Yudina launched a startup that aimed to offer parents a simple, affordable and accessible way to save for college, she initially focused on 529 college savings plans.

The plans are the go-to choice among financial planners advising clients on saving for a child's college bills. Yet last year, after offering 529 plans through her company, UNest, Yudina found those plans weren't the go-to choice for her clients. UNest's users wanted to save for their children's futures, but they weren't sure they wanted to save exclusively for college, and they didn't want to lock their money up in an account that would penalize them for spending on something else.

So UNest pivoted, instead choosing to offer Unified Transfer to Minors Act (UTMA) accounts, which have far more flexible spending options than 529 college savings plans, where you'll get hit with a penalty if you spend on unapproved items. The company's experience highlights a common question parents have when it comes to planning for their child’s future: where should we park our savings?

The standard advice from financial planners is that if you’re certain you want to use the money you’re saving for higher education, then it’s hard to beat a 529 college savings plan. But the pandemic has only underscored an already growing sense of skepticism over rising college prices and the value of a four-year degree, and many parents want more options when it comes to their hard-earned savings.

Alongside UNest, roboadvisor Acorns and startup EarlyBird also launched custodial accounts in the past year. The companies' internal research suggests that parents prefer the flexibility associated with custodial accounts, commonly called UTMA or UGMA accounts.

UTMAs vs. 529 plans: Why are 529s typically preferred for college savings?

First, a bit of background: 529 college savings plans are tax-advantaged savings accounts designed specifically for higher education. Your money grows tax free and you don’t pay any taxes on the earnings if you use the money to pay for qualified expenses. Those expenses include tuition, fees, room and board, and educational materials like computers or textbooks.