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.
