Consider a Reset of College Savings With a 529 Plan

Before 529 college savings plans became a popular way to fund a college education, many families utilized traditional custodial accounts (UTMA or UGMA). As 529 plans evolved, the definition of qualified education expenses expanded, making these accounts more competitive with other savings vehicles.

Tax treatment and custodial accounts

A primary benefit of custodial accounts is that (up to certain limits) unearned income generated is not taxed or only taxed at the child’s tax rate instead of a higher tax rate. Once the child’s unearned income exceeds a certain amount, the additional income is taxed at the parent’s marginal tax rate. Examples of unearned income include dividends, and capital gains.

For 2024, here is how the kiddie tax is calculated:

  • First $1,300 of unearned income—no tax
  • Next $1,300 of unearned income—taxed at child’s tax rate
  • Unearned income over $2,600—taxed at the parent’s marginal tax rate

Source: Internal Revenue Service, 2024.