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| Custodial Accounts |  Another tax-advantaged way to save for college is custodial accounts – Uniform Gift to Minors Act (UGMA) accounts or Uniform Transfer to Minors Act (UTMA) accounts. A grandparent, parent or other adult is custodian for the account and makes all the investment solutions until the child for whom the account was opened reaches the age of majority. UGMA accounts are limited to securities and money. UTMA accounts can hold other types of property. It is possible to establish these accounts at almost any brokerage firm, mutual-fund company or other financial institution.
Benefits
The first $850 of unearned income is tax-free for children younger than 18. The next $850 is taxed at the child's federal tax rate. Any earnings over $1,700 are taxed at the custodian's federal tax rate.
Your investing options are virtually limitless, as with ESAs. Nor are there any contribution or income limitations. Besides, withdrawals can be used for any purpose, not just qualified education expenses, without penalty.
Disadvantages
When your child reaches the age of majority – 18 to 25 depending on the state in which you live – he or she takes control of the account and can use the money in the account for anything. Some parents and grandparents may not like this option, because you lose control over how the money may be spent. You can't switch beneficiaries, because the account is considered the child's asset. It is another potential disadvantage. So you can't switch the money to a brother, sister or other family member, if your child decides not go to college or gets a scholarship.
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