|
Switching from Your UTMA/UGMA To A 529
Plan
Should you consider switching from your UTMA/UGMA to a 529
plan? This is technically possible but be aware, there are some
pitfalls. Before looking at this question, it may be useful to
be refreshed on the account basics.
The Uniform Transfers to Minors Act (UTMA) or the Uniform Gift
to Minors Act (UGMA) is a type of custodial account for
children. These uniform acts have been adopted by most states
as a way to transfer ownership of property to your children.
Both UTMA and UGMA provide for similar account features. In a
nutshell, these Acts allow you to fund an account for “little
Suzie”, but will limit the access of the account to her until
she is of age, typically 18-21 years depending upon where you
live. She is the actual owner of the account, but you are the
custodian. You will control the account until Suzie is no
longer a minor. Then the custodial relationship ends and she
will take control.
All gifts put into a UTMA/UGMA account are permanent gifts to
your child who is the beneficiary of the account. Once money is
placed in the account, you can make fund withdrawals only for
items that benefit your child. Some examples of these items
could be private school fees, a computer, books, piano lessons,
a learning camp, school transportation and other items as such.
Legally this is the child’s money. Thus, if custodial money is
transferred to a 529 plan, that ownership is supposed to be
maintained.
Since the money in your UTMA/UGMA fund needs to be used for the
benefit of your child, it means it is possible make an
investment into a 529 plan. The 529 plans must be established
for the same child. You can’t take the money from “little
Suzie’s” plan and put it into a new plan for “Little Bill”.
Different plans handle the switching from your UTMA/UGMA to a
529 plan in a couple of different ways. Either the minor child
becomes the owner as well as the beneficiary or you remain the
owner, but there may be restrictions on future changes to the
beneficiary.
In accordance with federal law, only cash can be contributed to
a 529 savings plan. This means that all of your current
investments in the UTMA/UGMA account need to be converted to
cash if the have been placed in real estate, stocks and such.
Keep in mind that making these transfers will usually be a
taxable event.
Perhaps a better idea would be to “spend down” the custodial
account on items that you would have purchased for your child
anyway. Items purchased need to be for the benefit of the
child. Also items cannot be a normal parental expense such as
food and shelter. It’s been said that you can revisit your
spending history and reimburse yourself for things like private
school fees, summer camp, music lessons and such. Then you
would take the money you’re reimbursed and make an equal
contribution into the 529 plan.
If you do decide to go ahead and make a direct transfer into a
529, it may be a good idea to keep the new funds in a separate
account and not mix them with other 529 funds. You are still
bound by the rules of the UTMA/UGMA accounts. This means that
you cannot change the beneficiary and you must turn over
control of the 529 plans when your child comes of age. All
future gifts to the switched plan will be treated like
UGMA/UTMA contributions and they are considered permanent gifts
to the child. Consider these ideas when switching your
UTMA/UGMA to a 529 plan.
| 
Delicious
Google Bookmarks
Stumbleupon
Digg
BlinkList
Ma.gnolia
Reddit
Yahoo My Web