UTMA/UGMA 529 Plan: Pros, Cons & Definition Compared to Traditional 529

A 529 plan that is funded through an UTMA/UGMA account is a type of college savings account. The funds in this account come from either a Uniform Transfers to Minors Act or a Uniform Gifts to Minors Act account.

The purpose of a 529 plan is to provide a tax-advantaged way for families to save for college expenses. These plans are sponsored by states, state agencies, or educational institutions and offer various investment options. The earnings on the investments grow tax-free, and withdrawals are also tax-free as long as they are used for qualified education expenses.

UTMA and UGMA accounts are custodial accounts that allow adults to transfer assets to minors without the need for a trust. The assets in these accounts are managed by a custodian until the minor reaches the age of majority, which is typically 18 or 21 depending on the state.

When funding a 529 plan with money from an UTMA or UGMA account, the custodian must transfer the assets from the custodial account to the 529 plan. The funds in the 529 plan are then invested in accordance with the investment options selected by the account owner.

One advantage of using an UTMA/UGMA 529 plan is that it allows for greater control over how the funds are used. When the minor reaches the age of majority, they gain control over the assets in the UTMA/UGMA account. However, with a 529 plan, the account owner retains control over the funds even after the minor reaches adulthood.

Another advantage of using an UTMA/UGMA 529 plan is that it can provide tax benefits. Contributions to an UTMA/UGMA account are subject to gift tax rules, which means that there may be tax implications for the person making the contribution. However, contributions to a 529 plan are considered gifts to the beneficiary and are subject to gift tax rules only if they exceed the annual gift tax exclusion amount.

In addition, earnings on investments in an UTMA/UGMA account are subject to the “kiddie tax,” which means that they are taxed at the parent’s tax rate. However, earnings on investments in a 529 plan are not subject to the kiddie tax, which can result in significant tax savings.

It is important to note that there are some potential drawbacks to using an UTMA/UGMA 529 plan. For example, the funds in an UTMA/UGMA account are considered the property of the minor and can be used for any purpose once they reach the age of majority. This means that the funds could be used for non-education expenses, which would result in tax penalties and loss of tax benefits.

In addition, the funds in an UTMA/UGMA account can affect a student’s eligibility for financial aid. Since these accounts are considered the property of the student, they may be factored into the student’s expected family contribution (EFC) when determining financial aid eligibility. This could reduce the amount of financial aid the student is eligible to receive.

Overall, an UTMA/UGMA 529 plan can be a useful tool for families looking to save for college expenses. However, it is important to carefully consider the potential benefits and drawbacks before making a decision. Consulting with a financial advisor or tax professional can also be helpful in determining whether this type of plan is right for your family’s needs.