At a glance
- A 529 college savings plan can help you reach your education savings goal.
- An UGMA/UTMA is a taxable account you can open on behalf of a minor.
- A taxable account, such as an individual or a joint account, can help you save for other goals like purchasing a house, buying a car, or saving for a vacation.
Saving for multiple goals?
You hear a lot about saving for retirement, but that’s probably not your only investment goal. With the right planning, it’s possible to save for multiple goals.
Before you open a nonretirement account, define your goal. Then consider your options. To help, we’ve paired some common investing goals with account options.
Goal: Saving for college
There’s more than one way to save for college. But for most people, a 529 college savings plan offers a mix of benefits that will get you the closest to your goal.
529 plans are usually sponsored by states, but you can invest in any state’s plan. And you can use the money you save to pay for school at any eligible educational institution in the U.S. and abroad.
Find a 529 plan
You can use a 529 to save for college for a beneficiary—which can be a child, another adult, or even yourself. This type of account offers several tax benefits to help you maximize what you save for educational expenses:
- You can deduct contributions on your state tax return (depending on your state’s rules).
- Your investment grows tax-free, so you don’t pay any tax on your earnings until you make a withdrawal.
- Withdrawals of contributions and earnings used for qualified education expenses aren’t subject to federal taxes and generally aren’t subject to state taxes.
- Contribution limits are high, and you can make up to 5 years’ worth of contributions at one time without triggering a gift tax.
If you save in a 529 and don’t end up needing the money for education expenses, you can give the money to a qualified family member without penalty. Or you can simply withdraw the money—just keep in mind, you’ll pay taxes and a penalty when you use the money for costs not considered qualified education expenses. The penalty applies only to your earnings, not contributions.*
College savings options
Learn more about 529s
Goal: Saving for a minor
If you’re saving on behalf of a child, you can open an account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).
Anyone can open or contribute to an UGMA or UTMA. Every contribution to the account is considered a gift and legally belongs to the minor—you can’t change beneficiaries for any reason. You can use an UGMA/UTMA to save for anything (other than parental obligations such as food, clothing, and shelter).
Understand investment basics:
Step 1—Understanding risk and return
Step 2—Choosing the right asset mix
Step 3—Saving for retirement
>> Step 4—Opening a nonretirement account
Step 5—Investing in a stock, bond, ETF, or mutual fund
Considering an UGMA/UTMA?
Considerations for the account owner
UGMAs and UTMAs are custodial accounts, which means the account owner is the custodian of the assets in the account until the minor becomes an adult. You can contribute as much as you want, but amounts above $15,000 per year ($30,000 for a married couple filing jointly) may incur the federal gift tax. Additionally, contributions aren’t tax-deductible and earnings are subject to federal income or capital gains taxes.
Considerations for the beneficiary
Upon reaching the age of majority, the beneficiary can use the assets for any purpose—educational or otherwise. There’s no penalty if the beneficiary doesn’t use the assets for college.
Keep in mind, UGMA/UTMAs are weighted heavily in federal financial aid calculations because the account is treated as the beneficiary’s—which can significantly affect aid decisions.
Goal: Saving for everything else
If you’re saving for a rainy day or something more specific—a house, a car, a vacation—you can open an individual investment account or a joint account.
If you have an individual account, you’re the only account owner. If you open a joint account, you share ownership of the account with one or more adults.
Interested in an account type we haven’t mentioned?
Learn about all of the account types we offer
Want a financial advisor to help you make investing decisions?
Learn about Vanguard Personal Advisor Services®
Do you have an emergency fund?Whether you call it a rainy day fund or an emergency fund, it’s important to have cash on hand in case of an unexpected event. Aim to save enough cash to cover your daily living expenses for 3–6 months, and keep your cash in a low-risk fund like a money market fund.
Emergency funds 101
Taxation of investment earnings
Individual and joint accounts are taxable accounts, which means they don’t provide any tax advantages. All contributions are post-tax (meaning you pay income tax on the money you invest), and investment earnings like dividends and capital gains are taxed the year you receive them.
A dividend is a payment of income to an investor. You may receive a dividend if you own a stock, bond, mutual fund, or ETF (exchange-traded fund) that produces income.
You can receive a capital gains distribution, which represents profits on an investment, if your mutual fund or ETF sells underlying investments for more than they originally cost. You can also get a capital gains distribution if you sell shares of your own investment (stock, bond, mutual fund, or ETF) for more than they originally cost.
Individual & joint accounts
It’s go time
Here are a few tips for simplifying the process:
What you’ll need
- About 10 minutes.
- Your bank account number and your bank’s routing number (if you’re transferring money electronically).
- Your current employer’s name and address (if you’re employed).
What you’ll need to decide
- The account type you want to open.
- How you’ll fund your new account (electronic bank transfer, check, or you can add the money later).
- What you’d like to do with your dividends and capital gains (you can always change your preference later).
Reinvest dividends and capital gains: Yay or nay?
If you earn dividends or capital gains in an UGMA/UTMA, individual, or joint account, they’ll be subject to annual income taxes, regardless of whether they’re reinvested.
If you reinvest dividends and capital gains, they’ll be invested in your account, where they can generate their own earnings (which is called compounding).
If you have dividends or capital gains transferred to a money market settlement fund, you can easily withdraw them for immediate use (but you’ll miss out on compounding).
What to expect
- We’ll review the information you entered and open your account.
- The money you initially invest will be automatically directed to a settlement fund, which is a money market mutual fund used to pay for and receive proceeds from brokerage transactions. Once your initial investment has been credited to your account, you can move some (or all) of your money to a different investment.
- You can sign up for web access to manage your account online.
Open a new account
What’s a money market settlement fund?
Read our next article for information about selecting your investments.
*If you received a tax deduction on your contributions, your state might require you to pay it back if you use the money for expenses that aren’t qualified. Some states also adjust the amount owed for inflation.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about any 529 savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
We recommend that you consult a tax or financial advisor about your individual situation.