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withdrawn earnings are excluded from income if used for qualifying higher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.
Sources:
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.
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.
Securities and investment advisory services offered through
National Planning Corporation (NPC), NPC
of America in FL & NY, Member FINRA/SIPC, and a Registered Investment
Adviser. Registered Representatives of
NPC may transact securities business in a particular state only if first
registered, excluded or exempted from Broker-Dealer, agent or Investment
Adviser Representative requirements. In
addition, follow-up conversations or meetings with individuals in a particular
state that involve either the effecting or attempting to effect transaction in
securities, or the rendering of personalized investment advice for
compensation, will not be made absent compliance with state Broker-Dealer,
agent or Investment Adviser Representative registration requirements, or an
applicable exemption or exclusion. Kemp
Harvest Financial Group and NPC are separate and unrelated companies. NPC
PRIVACY POLICY. NPC #
81610 02/16The information being provided is strictly as a
courtesy. When you link to any of the
web sites provided herewith, you are leaving this site. We make no representations as to the
completeness or accuracy of the information provided at these sites. Nor is the company liable for any direct or
indirect technical or system issues or any consequences arising out of your
access to or your use of third party technology, sites, information and
programs made available through this site.
By clicking on the links above you will leave our web site and assume
total responsibility and risk for your use of the sites to which you are
linking.
