By Kaye A. Thomas
Current as of July 8, 2016
In the right situation, transferring a UTMA account to a 529 account can produce benefits.
People who have set up custodial accounts under the Uniform Transfers to Minors Act (“UTMA”) sometimes wonder whether it might make sense to move the money to a 529 college savings account. In the right situation this transfer can produce benefits, though it won’t necessarily achieve all that you might hope.
Depending on your circumstances, you may be looking to achieve any of the following advantages in making this transfer:
- Financial aid. The account will receive more favorable treatment under the federal financial aid formula.
- Tax savings. The transfer may produce tax savings, but these may be offset by an initial tax cost.
- Greater control. Sorry, there’s not much to be gained here. UTMA rules continue to apply after the transfer.
Let’s look at key differences between the two types of accounts and then examine these potential benefits of making a transfer.
529 account compared with UTMA
When a UTMA account is created, an adult known as the custodian manages assets that are owned by a minor (often, but not necessarily, received as a gift) until the minor reaches a specified age. A 529 account holds savings intended to be used for education expenses of a named individual who is usually not the owner of the account. Here are some other key characteristics of UTMA and normal (non-custodial) 529 accounts:
- Investments. A 529 account can hold only investments chosen from the list made available by the plan under which it is established. Also, you’re generally allowed to change those investments only twice in a calendar year. A UTMA account can invest in just about anything, and its investments can be changed as often as the custodian sees fit.
- Taxes. Investment earnings of a 529 account are not taxed until withdrawn, and if withdrawals are used for qualifying expenses, the earnings will be tax-free. Investment earnings of a custodial account are currently taxable to the child who owns the account.
- Beneficiary. The owner of a 529 account can change the beneficiary to another family member if, for example, the original beneficiary wins a full scholarship or decides not to go to college. In a UTMA account, the minor is not merely the designated beneficiary; he or she is the owner. The donor or custodian cannot change the owner.
- Revocation. The owner of a 529 account can take the money back and use it for his or her own purposes (but must pay tax and penalty on the earnings). A transfer to a UTMA account is irrevocable: the donor cannot take the money back.
- Control. The custodian of a UTMA account is required to transfer control of the account to the minor at a specified age, generally 18 or 21 depending on state law, and in some cases depending on the age specified when the account was set up. The owner of a 529 account can retain control even after the designated beneficiary reaches age 21.
- Financial aid. A 529 account is included in the parents’ assets for purposes of the student financial aid formula. A UTMA account is included in the student’s assets, which reduces the potential award because the percentage contribution toward college expenses is greater from students than from parents.