UGMA and UTMA are two types of savings accounts set up by an adult, usually a parent, to save money for a child. UGMA stands for the Uniform Gifts to Minors Act, and UTMA -- the Uniform Transfer to Minors Act -- is a newer version of the account type. Both versions create custodial accounts, the type in which assets are transferred to the minor as an irrevocable gift but controlled by an adult custodian until the minor reaches age 18 or 21, depending on the state. Either can be moved to a state-sponsored 529 college savings plan.
Because UGMA/UTMA assets belong to the child beneficiary, they cannot just be moved into a 529 college savings plan, a type of educational savings account created under state laws and available in all 50 states. The stocks, cash or other assets in the UGMA/UTMA must be liquidated, in effect closing those accounts. Securities and non-cash assets have to be converted to cash, because 529 plans accept only cash contributions.
The UGMA/UTMA earnings will be subject to income tax when they are liquidated. The first $950 of earnings is tax exempt, and amounts above that are taxed at the child's tax rate, up to $1,900. Income above $1,900 is taxed at the rate of the parent or other adult custodian. Large accounts may be subject to estate or gift taxes.
529 Custodial Account
UGMA/UTMA funds have to be put into a special UGMA/UTMA 529 custodial account, which is different from a conventional 529 savings plan. It has to be in the child's name, and the beneficiary can't be changed, which is not the case with a conventional 529 plan. The minor also gains full control of the account at 18 or 21, depending on the state, while a conventional 529 remains in the control of the adult account holder.
Student Aid Benefit
UGMA/UTMA conversions may help a student secure financial aid. A $10,000 UGMA certificate of deposit, for instance, may increase the expected family contribution on a federal aid form by $2,000. Cashing out the CD and moving the cash to a 529 will cut that monetary impact to $564 or less. Interest earned in a 529 is tax free, while UGMA earnings are taxable.
State Laws Govern
Because 529 plans are created by states, specific state requirements should be verified before making any transfers. In general, plans allow contributions to grow tax free as long as money is used for educational expenses. State laws also affect UGMA/UTMA accounts, including setting the age at which the child reaches adulthood. Some states offer income tax benefits for contributions to 529 plans.
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