Q. Back in the 1990s, before 529 education plans were created, I opened Uniform Transfer to Minors Act (UTMA) accounts for both my children as a way to save for college.
I'd now like to shift that money into 529 plans. Is it possible to do so without paying taxes or fees?
-- Curious dadA. There are consequences to making the change from a UTMA to a 529 plan.
The first: taxes. You can't transfer the investments in a UTMA to a 529 plan. You need to sell, then transfer the cash to the 529. Depending on how your UTMA investments have fared in the market, you may be selling at a gain or a loss. If the investment has gained value, you may have a tax liability on the gains.
"Under the 'kiddie tax,' children with incomes in excess of $1,900 get taxed at the parent's tax rates," said Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield.
529 plans can offer better tax benefits than UTMAs, Lynch said. Money invested in a 529 grows tax-deferred and can be used income tax-free for college, and some states offer tax incentives.
Ownership is another big difference between UTMAs and 529s, depending on how you set up the account. Lynch said if the child decides not to go to college, 529 money can be used for another child or you can get the money back by only paying a 10 percent penalty and taxes on the gain.
But a 529 plan created with UTMA funds is treated somewhat differently.
"The dollars you are transferring from the UTMA accounts must be transferred to a 'custodial' 529 plan and will continue to be subject to the same rules and restrictions as the UTMA account," said Diahann Lassus, a certified financial planner and certified public accountant with Lassus Wherley in New Providence.
"Unlike regular 529 plan accounts, the UTMA account does not allow you to change the beneficiary. The funds are considered your child's funds and pass to him/her at the legal age defined by state law."
There's another big advantage if your child is looking for financial aid. Custodial 529 plans are treated as a parental asset rather than as the child's asset for financial aid purposes, Lassus said, so a 529 won't count as heavily in aid calculations.
One note on your question about fees: If the investments within your UTMA are "B" shares, you could be subject to back-end surrender charges which are charged when you sell, Lynch said. Take a look at your investments and make sure you're out of the fee window if you own "B" shares.