By Kaye A. Thomas
Current as of July 8, 2016
Learn what’s involved in transferring custodial UTMA assets to a 529 account.
We need to settle some preliminary issues before looking at the consequences of moving from a UTMA account to a 529 account.
Permitted by the Uniform Act
The Uniform Transfers to Minors Act does not contain rollover rules or other provisions specifically dealing with the transfer of assets from one account to another. Yet the law gives the custodian “all the rights, powers and authority over custodial property that unmarried adult owners have over their own property,” provided the custodian exercises those powers “in a custodial capacity,” that is, on behalf of the minor who owns the account. An adult owner would be able to move money from an investment account to a 529 account, so a custodian is permitted to do so on behalf of the minor.
A key concept here is that removing money from the UTMA account does not terminate the custodianship. When you take money out of an IRA, it ceases to be IRA money, but money taken from a UTMA account continues to be custodial property. The custodianship continues until the specified age at which control of the assets passes to the minor.
The Uniform Act requires the custodian to “keep custodial property separate and distinct from all other property in a manner sufficient to identify it clearly as custodial property of the minor.” This means the transfer must be to a 529 account that is set up as a custodial account. Instead of being set up as an account simply listed in the name of the person paying in the money, the account should be designated something like this:
[custodian’s name] as custodian for [minor’s name] under the [state] Uniform Transfers to Minors Act
The money will then be in a 529 account, but must continue to be managed according to the requirements that apply to custodial accounts under UTMA. The custodian manages the account, making investment choices and deciding when and how to spend money from the account for the benefit of the minor, but the minor is the owner of the 529 account.
Accepted by the 529 plan
You can do this only if the 529 plan you’ve chosen will accept such transfers. Years ago, when 529 plans were relatively new, many of these plans were reluctant to accept custodial accounts. Our sense is that all of these plans, or nearly all, now welcome these accounts, but you should inquire before beginning the steps required to make the transfer.
Need to cash out
One other point about the mechanics of the transfer: 529 accounts can receive only cash contributions. There’s no way to transfer investments held in a UTMA account directly to a 529 account, even if they happen to be assets that are permitted investments in the 529 plan. To make the transfer, you’ll first have to liquidate all investments in the UTMA account.