09 Mar Moving an UTMA into a 529 Plan
Photo: czbrat/morguefile.comQ. My kids all have UTMA accounts but I’m thinking of rolling the money into 529 Plans. What do I need to know?
— College saver
A. 529 Plans are very popular for college savings, but it’s not a slam dunk to move the UTMA assets to 529 Plans.
To answer your question more precisely, it would be helpful to know your children’s ages and how much is in the current Uniform Transfer to Minor Act (UTMA) accounts, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield.
He said an UTMA is a vehicle that allows minors to own securities as well as other assets such as real estate, and the rules for these accounts vary from state to state.
“By setting up the UTMA for your children, you `gifted’ them any assets contributed to the account,” Gobo said. “Although you have retained control as the custodian, the assets can only be used for your children’s benefit.”
In addition, when they reach age 18 or 21 (depending on the state) they will assume control of all the assets, he said.
Because the assets are considered property of the children, there’s a tax advantage. The first $1,050 of earnings are tax-free, the next $1,050 is taxed at the child’s rate, and the balance is taxed at the parent’s rate, Gobo said.
“These assets, however, may be counted against them in college financial aid calculations,” Gobo said. “Whereas 529 savings plans, since they are owned by the account holder on behalf of a beneficiary, reduces the impact on eligibility for financial aid.”
To address your question, Gobo said it’s important to remember that once the money was gifted into the UTMA, it stays gifted.
“You may be able to `roll’ the UTMA into a 529 Plan, creating an UTMA 529 hybrid, or custodial 529,” Gobo said. “These assets would grow tax-free and allow for tax-free distribution to cover qualified college expenses.”
But not all 529 Plans allow transfers from UTMA accounts, so you must check to see if a transfer is possible.
“If it is, the UTMA would have to be cashed out first — triggering a potential capital gains tax,” Gobo said. “You should calculate this potential tax in order to determine if the `rollover’ makes sense.”
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This story was first posted in March 2016.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.