2020 saw the lowest college education increase in the last four decades due to the shift to online classes over the past year. According to the Bureau of Labor Statistics, the most significant annual change in college tuition and fees was in 1982 at 14.2%, while overall inflation was up 6.6% over that same time. Contrast that with November 2020, which saw the lowest year-over-year change in the average college education expenses at 0.6% as colleges shifted to online classes during the pandemic.
But since 1980, the cost of college (tuition and other fees) has risen by 1,200%.
Did you know you could fund a 529 plan with UGMA/UTMA assets?
Before the popular 529 College Savings plans were introduced, many people saved for their children’s education, depending on their state of residence, using either a Uniform Gifts to Minors Act (UGMA) account or a Uniform Transfers to Minors Act (UTMA) account. For those looking to reap the tax benefits that 529 plans offer today, it is possible to fund most 529 plans with assets from a UGMA or UTMA; however, no two 529 plans are alike. Therefore, before an investment is made in a particular 529 plan, the rules applicable to that specific plan should be reviewed carefully.
How It Works
The adult custodian of a UGMA or UTMA must manage assets in the minor child’s interest. They can 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 is considered the plan’s owner until the child reaches the legal age of majority (typically 18 or 21, depending on the state). The child then becomes the owner. Until that time, the adult custodian makes investment decisions.
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 a UGMA or UTMA is irrevocable. If funds are transferred into a 529 plan, when a child reaches the age to become the owner, they become entitled to make the money management decisions. If funds are not used to pay for qualified college education expenses, earnings will be subject to a 10% Federal income tax penalty, as well as ordinary income tax.
Transfers from a UTMA or UGMA to 529 plan accounts must be made in cash only. Therefore, it may be necessary to sell UGMA/UTMA assets, such as stocks or mutual funds. Capital gains tax may be due. However, future withdrawals from a 529 plan will not be federally taxed if used for qualified higher education expenses, such as eligible tuition, room, and board. Keep in mind that the 529 plan carries a 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, get familiar with the pros and cons of different state plans, including your own. In addition, be sure to consult a qualified financial professional about developing an effective strategy to help achieve your long-term financial goals.