Should You Fund a 529 with UGMA/UTMA Assets?
Craig Hackler, Financial Advisor, Raymond James Financial Services
If you’re using an UGMA
or UTMA account to
save for a child’s college
education, you may consider
transferring all or part of those
assets to a 529 plan. Converting
a taxable account
(UGMA/UTMA) to a taxdeferred
and potentially taxfree
investment vehicle (529)
may expedite asset growth and
help meet the ever-increasing
cost of a child’s higher education.
An UGMA/UTMA does not
involve the same tax benefits as
529 plans. In an
UGMA/UTMA, earnings above
$850 are taxed at the child’s
rate when the child is 18 or
older (the first $850 is exempt).
Prior to that age, the ìKiddie
Taxî rules apply. These rules
allow the first $850 of earnings
to be exempt. The next $850 is taxed at
the child’s rate, and earnings in excess of
$1,700 are taxed at the parent’s rate. Once
an UGMA/UTMA is converted to a 529
plan, earnings grow tax-deferred and distributions
are tax-free* from federal and
most state income tax if used for qualified
higher education expenses. Some states
also offer state tax deductions for contributions
to in-state 529 plans. Besides the tax benefits, it is important
to consider several other implications of
an UGMA/UTMA-to-529 transfer. First,
assets in the original UGMA/UTMA
account must be liquidated before contributing
to a 529 plan. This could trigger
capital gains or other tax consequences.
Also, 529 plans funded by UGMA/UTMA
accounts retain certain characteristics of
an UGMA/UTMA while foregoing some
benefits of 529 plans. For example, a regular
529 account allows the account owner
to:
Control assets no matter the
beneficiary’s age
Consider plan assets as his or her own
for financial aid purposes
Change the beneficiary at any time
Withdraw plan assets for any reason
However, with a ì529-UGMA/UTMAî
account,
The beneficiary gains control of the
assets at age of majority
The account is still considered the
beneficiary’s asset for financial aid
The account owner cannot change the
beneficiary
Withdrawals can only be used for the
beneficiary as specified under the UGMA/UTMA statute.
Therefore, the tax advantages of a 529 plan
should be the main reason for moving
UGMA/UTMA assets.
Another thing to keep in mind is that
the purpose of 529 plans is to
provide a savings place for
higher education. Expenses
such as the cost of braces, highschool
supplies or any other
pre-college expense will not be
paid for by the 529 without taxation
and a 10% penalty on
earnings. As such, the custodian
may want to leave the portion
of UGMA/ UTMA assets
meant for pre-college expenses
in the account and only transfer
the amount meant for college
costs to a 529 plan. If the
custodian plans on making
additional contributions in the
future (contributions intended
for college expenses), a new
account separate from the 529-
UGMA/UTMA should be
opened in order to take advantage
of all the benefits that a 529
offers. Of course, this brief article is no substitute
for a careful consideration of all of the
advantages and disadvantages of this matter
in light of your unique personal situation.
Before implementing any significant
tax or financial planning strategy, consult
your financial planner, attorney or tax
advisor as appropriate.
* Withdrawals for qualified education
expenses became federally tax-free effective
January 1, 2002.
Craig Hackler holds the Series 7 and Series
63 Securities licenses, as well as the Group I
Insurance license (life, health, annuities).
Through Raymond James Financial Services,
he offers complete financial planning and
investment products tailored to the individual
needs of his clients. He will gladly
answer your questions. Call him at
512.894.0574 or 800.650.9517
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