Thursday, July 23, 2015

College Savings – 529 Plans and UTMAs

In previous posts we’ve discussed considerations for college planning. In this post we are going to discuss saving for college and, specifically, two of the more common accounts for college savings: Uniform Transfer to Minor Account (UTMA) and Section 529 Plans.

The Uniform Transfer to Minor Account (UTMA) was an early popular choice for many families to save for college education as it offered a few advantages over traditional savings accounts. First, the transfer of assets was treated as a completed gift which removed the assets from the donor’s gross estate. As a gift, it was subject to the current annual gift exclusion ($14,000 in 2014). Second, any unearned income received favorable tax treatment, albeit lessened with the advent of the “kiddie tax.” Unearned income is generally investment income including interest, dividends and capital gains. Under the current tax code, the first $1,000 of unearned income is exempt using the standard deduction for dependents; and the next $1,000 of unearned income is taxed at the child’s income tax rate. However, any unearned income in excess of $2,000 is taxed at the parent’s marginal tax rate. One drawback to the UTMA is it is considered an irrevocable gift. When the recipient reached the age of maturity – 21 in Pennsylvania and most other states – the custodianship ends, meaning the recipient now has full control and can dispense with the assets however they choose.

Section 529 Plans arose out of the creation of Section 529 of the Internal Revenue Code in 1996. These 529 Plans have seen tremendous growth in the decades since due to several key advantages. First, although they are also considered completed gifts, they allow the donor to make up to a 5-year election meaning they can give up to 5 times the current annual gift exclusion ($70,000 in 2014; 5 x $14,000). Unlike UTMAs, however, they are not considered irrevocable gifts, meaning the donor can change the beneficiary or even withdrawal the funds at a future date. (Tax implications and penalties may apply for withdrawals not used for qualifying expenses.) Second, all contributions are non-deductible, but all withdrawn earnings are excluded from income if used for qualifying higher education expenses. Another key difference is the treatment of the accounts from a financial aid standpoint. While UTMAs are counted as a student asset, and therefore subject to higher expected contribution rate, 529 Plans are usually counted as a parent asset and subject to a lower expected contribution rate. In other words, 529 Plans are typically less harmful in the determination of financial aid eligibility.

For those looking to establish a college savings program for their children or grandchildren, a 529 Plan certainly warrants strong consideration. Even those who already have existing UTMAs may ask, “Can I change my UTMA into a 529 Plan?” The simple answer is yes, but the decision should be made carefully. For starters, Custodial 529 Plans must be set up with cash, so all investments in the UTMA must first be sold which may have tax implications if there are capital gains. Other factors to consider include the age of the child, expectation and timing of higher education expenses, investment options and account size. Always consult your financial planner or tax advisor before making the decision to convert an UTMA to a Section 529 Plan.

If we at Kemp Harvest Financial Group can help you in any way with regard to your financial planning needs, please feel free to contact us.


An investor should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing.  More information is available in the issuer’s official statement which can be obtained from your financial professional.  The official statement should be read carefully before investing.
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