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The College Funding Question – “What if they don’t go to college?”

529 Account Flexibility and Advantages

529 plans often stir up a major question with parents, “What if my kid doesn’t want to go to college?”. It’s a valid question, but the hesitation it causes can lead to missing out on big tax savings. 529 plans have two major advantages: First, all earnings in the account are tax-deferred until withdrawn. Second, the withdrawals can be tax free as long as they are used for qualified expenses. This means the earlier you start adding money to the plan, the more advantageous the strategy due to compound interest. There are contribution limits based on the annual gifting exclusion, with an opportunity to superfund the accounts, which should be coordinated with your comprehensive financial plan. Be sure to select an investment strategy that matches your child’s time horizon for school.  

Something we often see parents use when they have trouble answering the “What If” question is a savings account or UTMA Account (Uniform Transfers to Minors Act), which gives the child more flexibility on how the money can be spent.  While UTMAs have some tax advantages, they are  significantly inferior to those of a 529 plan if the funds are used for qualified expenses. But, UTMAs are still an excellent option for stashing away and investing some funds for your children.  

The “What if” is lingering in your mind; what should you do? Lets look at the flexibility of 529 plans.  

529 Account Flexibility & Advantages 

  • You Own It: You own the 529 for the benefit of your child. Which means you never lose control of the assets unless you choose to give it up or distribute.  
  • Tax Advantages: Tax deferred growth and potentially tax-free distributions.  
  • Trade School: College isn’t the only path to success. 529 plans can also pay for trade school, vocational schools, and two-year associate degree programs.  
  • Apprenticeship programs: fees, books, supplies, and equipment necessary for these programs typically count as qualified expenses. 
  • Private Elementary & Secondary School: you can use $10,000 per year from their 529 for private education. 
  • Graduate school: you can use the funds to pay for a master’s degree, doctorate, and most other post-secondary education.  
  • Student loan payments: $10,000 lifetime limit. 
  • Roth Contributions: Under the new SECURE 2.0, starting in 2024, you can make annual contributions to a Roth for the beneficiary from their 529 plans. There is a $35,000 lifetime limit, it is subject to annual contribution limits, and the 529 needs to be in existence for 15 years. Be careful not to change beneficiaries if you hope to use this strategy, as this is a recent change and some details need to be fleshed out.  
  • Scholarships: Distributions can be made for the same amount of scholarships or grants received for the child’s education.  
  • Shift Beneficiary: You can always change the beneficiary of a child’s 529 to their sibling or another qualifying family member should they not use the funds.  
  • Additional Benefits: There are benefits for 529 use around death, disability, U.S. Military Academies, and educational assistance through qualifying employee programs.  

Should the “other” options above not work for your situation, a non-qualified distribution can always be made. The earnings portion of the distribution will be taxed at the recipient’s ordinary income tax rates, and a 10% penalty will be assessed. While this isn’t ideal, it might not be as big a burden for most recent college graduates just getting started in their careers. Or who knows, maybe they are in need of a gap year and have 0 income.  

UTMA Advantages 

What the UTMA account lacks in tax savings, it gains in flexibility.  

  • Limitless Spending Options: You can use the UTMA for anything as long as it is for the benefit of the beneficiary. It is a great tool for parents hoping to save and invest for a child’s first-time home purchase or just get them started with a “launch fund.” 
  • Control Until Age of Majority: UTMAs are set up with a parent as custodian and a child as beneficiary. The parent controls the account entirely until the child reaches the age of majority, at which point the child takes control of the funds (age 18 to 25 in Alaska).  
  • Investment Options: They have nearly unlimited investment choices (529s are limited to select mutual funds). 
  • Tax Benefits: Generally, the first $1,150 of investment income is not taxed, the next $1,150 is at the child’s rate (likely low). Income over $2,300 is taxed at the parent’s rate. 

It is important to note that your gift to the UTMA account is irrevocable, meaning you can’t take funds back or use it for anything other than the child’s benefit.  The UTMA accounts become a regular brokerage account for your child when they reach the age of majority, providing them the flexibility to spend or save as they please. If the investments inside the UTMA have grown, the child will have capital gains tax to pay on the sale of investments, which can be a more favorable rate than ordinary income taxes.  

FAFSA Considerations 

529 accounts typically impact overall financial aid eligibility less than UTMA accounts do. 529 accounts owned by the student or parent must be reported as an investment asset on the FAFSA. The investment asset is typically reported on the parent’s FAFSA, reducing aid eligibility by up to 5.64% of the asset value.   

UTMA accounts are reported as a child’s asset on the FAFSA, reducing aid eligibility by 20% of the asset value. 

The 529 Grandparent “loophole” has “potentially” been opened. In the past, a grandparent owned 529 caused issues with financial aid, due to distributions being considered untaxed income, resulting in a reduction in student aid eligibility by 50%. With the new FAFSA going live in October 2023, it appears Grandparent owned 529 plans will no longer negatively impact financial aid. This is subject to change, but worth considering.  

Bottom Line 

529 plans are the best option if you hope, expect, or require your child to use the funds for education. Even if your child doesn’t use the funds for education or one of the many exceptions, tax-deferred growth in 529 plans can be a valuable savings tool.  

UTMA plans are a great option if you would like to set your child up with a “launch fund” or if you are certain they will not attend college and want to help them get started. These accounts can also be used for other expenses related to sending your kids to school, like transportation costs and testing fees.  

Often a blend of the two accounts can be a nice way to provide funds for education while also setting up your child with a starter fund. Be sure to check in with your team of financial advisors to help determine the best strategy for your children’s college funding.  


Connor Michael, CFP®
Financial Advisor




Commentary: The opinions expressed are those of Alaska Wealth Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.

Note: This material should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.

Adviser Disclosure: Alaska Wealth Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2, which is available upon request.

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