Transfers From UTMA Accounts To 529 plans
Notable Differences Between UTMA and 529 Plans
An UTMA account (Uniform Transfers to Minors Act) may be established in any state except Vermont and South Carolina. These two states use UGMA accounts which carry the same restrictions as UTMA accounts. The custodian of these accounts (typically a parent or grandparent) has agreed to gift this money to a child and act as the custodian of these funds to benefit the minor.
Once an UTMA account is set up, the custodian then acts as a fiduciary and agrees to use the funds only for purposes that directly impact the minor. UMTA accounts may not be cancelled unless the minor reaches the age of distribution or the minor dies. The funds in the UTMA account cannot be transferred to another minor.
The most significant difference between an UTMA and a 529 plan is that the custodian of a 529 plan has the right to change the ownership of the account from one minor to another.
However, once the minor reaches the age of distribution on an UGMA or UTMA account, the minor has the right to use the funds as they deem appropriate to their own personal circumstances. This means that if they elect to not use the funds in an UTMA account for college purposes, there is no way they may be forced to do so. 529 plans differ in that they may only be used for education related expenses.
Although a custodian may make transfers from UTMA accounts to 529 plans the financial ramifications may make this challenging due to the nature of the two plans. It is best to verify with a financial planner before doing this. It is also imperative that the broker dealer or other investment firm where the funds be held be asked about the legal requirements for making this transfer.
Compare 529 To UTMA
Some of the legal considerations when you begin to compare 529 to UTMA is the nature of the gift. When funds are gifted to the minor in an UTMA account, these gifts are considered irrevocable; the funds are deposited in the minors name with the adult as custodian. This means that the funds must only be used for expenses that are directly related to the minor. In the event that the custodian prefers that the funds be used only for higher eduction, then an UTMA account may not be the best choice. The custodian cannot transfer these funds from one minor to another minor.
Most 529 plans allow the custdian to transfer the ownership from one minor to another. There are several reasons behind this, for example, one child may not be interested in furthering their education. Unlike the UTMA plan, the funds belong to the custodian and not to the minor, taking the decisions for this account way from the minor regardless of their age.
Compare 529 to UTMA Funds Control
When a minor reaches the age of majority (18 to 25 on an UTMA account, set by the state), they gain full control over all funds that are in an UTMA account. They are free to use it for any reason they elect to. 529 plans are controlled by the custodian at all times and may only be used for educational expenses. The difference in who controls UTMA and 529 plans will be a factor in deciding which account to open.
Compare 529 to UTMA for taxes
For those who are considering transfers from UTMA accounts to 529 plans, there may be some tax benefits. Capital gains and dividends that are earned in an UTMA account are taxable. 529 plans are considered by the Internal Revenue Service as a Qualified Tuition Program and therefore are not subject to federal taxes on earnings.
Compare 529 to UTMA for limits
UTMA accounts have no restrictions on how much money may be deposited to the account. However, 529 plans do have limitations as the funds may only be sufficient for the minor to attend school and pay for school related expenses.
Disclaimer: Adults who are considering financial gifts to minors through an UTMA, UGMA or 529 plan should always speak with a reputable financial advisor. They can assist you with the most recent information on any changes to the laws as well as help with other investment advice.
- Oppenheimer Funds: UTMA/UGMA Accounts https://www.oppenheimerfunds.com/articles/article_09-23-10-122137.jsp
- Kipplinger: UTMA/UGMA & 529 https://forums.kiplinger.com/showthread.php?2472-UGMA-UTMA-amp-529
- Internal Revenue Service - Tax Topic 313 Qualified Tuition Program https://www.irs.gov/taxtopics/tc313.html
- Author Experience in Mutual Fund Industry
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