Uniform Gift to Minors Accounts put assets in the child's name and provide earnings with some tax advantages, Lockwood explained. After that, it's taxed at the parents' rate until the child is 14, and then at the child's rate. Income is taxed in the year it's earned. Also, since Uniform Gift to Minors Account assets are in the child's name, they count more against eligibility for needs-based scholarships than do parents' assets. Education IRAs aren't really IRAs, according to Lockwood, but have similar characteristics.
Several restrictions limit the account's appeal.
Donors can't make any contributions in years when their annual income is higher than a built-in cap. Also, the money in the account must be used by the time the beneficiary turns 30. After that, there's a 10 percent penalty on earnings in addition to the deferred taxes. And finally, federal regulations prohibit contributions to both an education IRA and a 529 fund for the same child in the same year. They won't incur early withdrawal penalties, but they will have to pay taxes on earnings.