I just attended a session on paying for college, and the speaker said it would be a good idea to move money from a Uniform Gifts to Minors account in our son’s name to his 529 account, which is considered to be an asset belonging to the parent when the colleges are figuring out our expected family contribution. Can you think of any possible drawbacks to doing this? Thank you!
A:
There is only one potential drawback that I can think of. If the UGMA account holds stocks, mutual funds, or other investments, you will have to sell the investments since 529s can only accept cash. Depending on the child’s age and income, that would either be taxed at the child’s rate or at your rate due to the kiddie tax rules.
In addition to the 529 being counted as an asset of the parent, it also has other advantages compared to the UGMA. If the money from the 529 is used for qualified higher education expenses, you will owe no tax on any interest or investment gains in that account. And, you don’t have to worry about an irresponsible child using the UGMA funds for something other than education.
According to savingforcollege.com, a 529 plan that is funded with money from an UGMA or UTMA account should be labeled as a “custodial 529” to reflect the fact that you will not be able to change the beneficiary as you would with the usual 529 plan. When you set up the 529, alert the new custodian that the money is coming from an UGMA account.
