UGMA/UTMA or Coverdell ESA?
Here’s a brief summary of how these accounts work.
|Who controls the account?||The custodian (usually a parent), but only until the child reaches the state's age of majority (18 or 21).||The "Responsible Individual" (usually a parent), but only until the child reaches the state's age of majority (18 or 21)|
|Is there a contribution limit?|
|Yes. $2,000 per year until the minor turns 18.|
|Are there any restrictions?|
|Yes. If your income is between $95,000-$110,000 ($190,000-$220,000 if filing a joint tax return), the $2,000 limit is reduced. If your income is more than $110,000 ($220,000 if filing a joint tax return), you cannot contribute to an ESA.|
|Do the earnings grow tax-deferred?||No. Earnings are taxed at the child's or the parent's rate.||
|Are withdrawals tax-free?||No. Withdrawals are taxable.||Yes, if withdrawals are used for certain educational expenses.|
|Can the minor on the account be changed?|
|How does the account impact the ability to receive federal financial aid?||Usually considered an asset of the student and therefore, has a high impact on financial aid eligibility.||Usually considered an asset of the parent and therefore, a low impact on financial aid eligility.|
* States have adopted either the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act.