The 2021 World Series and the 2022 MarketsNovember 5, 2021
Estate Planning is a Team EffortNovember 5, 2021
Prior to the popularity of 529 plans, many people saving for their children’s education opted for either a Uniform Gifts to Minors Act (UGMA) account or a Uniform Transfers to Minors Act (UTMA) account, depending on their state of residence. Today, for those looking to reap the tax benefits 529 plans offer, it is possible to fund most 529 plans with assets from an UGMA or UTMA; however, no two 529 plans are alike. Before an investment is made in a particular 529 plan, the rules applicable to that particular plan should be reviewed carefully.
How It Works
The adult custodian of an UGMA or UTMA has the right to manage assets in the interest of the minor child, and may choose to transfer money to a 529 plan, provided the minor is named as the beneficiary of the 529 plan. The UGMA or UTMA custodian will be considered the owner of the plan until the child, upon reaching the age of majority (legal adult age, generally 18 or 21, depending on the state), becomes the owner. Until that time, the adult custodian makes investment decisions.
In order to direct or transfer a minor child’s UGMA/UTMA assets into a 529 plan account, a parent or adult custodian would need to open a UGMA/UTMA 529, also known as a custodial 529 account, which specifies a 529 plan account funded with UGMA/UTMA money already owned by a minor child.
It is important to note that an UGMA or UTMA is irrevocable, and if funds are transferred into a 529 plan, when a child reaches the age to become the owner, he or she becomes entitled to make the money management decisions. If funds are not used to pay for qualified education expenses, earnings will be subject to a 10% Federal income tax penalty, as well as ordinary income tax.
UTMA fund transfers into 529 plan accounts must be made in cash only, so it may be necessary to sell UGMA/UTMA assets, such as stocks or mutual funds, and capital gains tax may be due. On the other hand, future withdrawals from a 529 plan will not be federally taxed if they are used for qualified higher education expenses, such as eligible tuition, room, and board. But the 529 plan carries the potential risk of a future tax and penalty, if the 529 account funds are used for something other than college.
As you consider investing UGMA/UTMA assets in a 529 plan, familiarize yourself with the pros and cons of different state plans, including your own. Be sure to consult a qualified financial professional to develop an effective strategy to help achieve your long-term financial goals.
*529 Plans are state sponsored investment programs. There is no guarantee by the issuing municipality or any government agency. You should consider the potential benefits (if any) that your own state’s plan (if available) offers to residents prior to considering another state’s plan. There may be tax benefits to plans offered by your resident state. As with all tax-related decisions, consult with your tax professional.
Annual asset charges for a 529 plan may be higher than corresponding share classes of underlying mutual funds. Municipal fund securities (529 plans) are sold by offering statement, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest. Investment return and principal value will fluctuate with changes in market conditions such that shares may be worth more or less than original cost when redeemed. Diversification cannot eliminate the risk of investment losses.