How to get money out of 529 account?

Paying for College
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<p>Ah, form 8615, my favorite! "Tax for children under age 18 with investment income of more than $1700". The age limit used to be 14, but will steadily rise with my child until it reaches age 24 also. </p>

<p>dlbarber, i didn't think you could take back money in a UGMA and put it in your assets. Your child can use it to purchase things, but once you give them that money, I was under the impression that it is theirs.</p>

<p>MSMDAD, I think the unearned income limit for dependents is $850. Below that, it would not cause federal tax to be owed. Here in PA, they have to file state tax on anything earned. Your state may vary.</p>

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<p>Yes, it is theirs, so there is nothing preventing them from giving it back to their parents. There may be tax implications, but in principle it is a lawful maneuver.</p>

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<p>
[quote]
Do you know what the threshold is (in $$) for a student to have to file federal and state tax returns?

[/quote]

For federal taxes the income thresholds for a dependent to have to file a tax return in 2007 was:
earned income $5350.
unearned income $850
both earned and unearned income The larger of
1.$850, or
2.Your earned income (up to $5,050) plus $300.</p>

<p>There are other rules for other income such as self employment income etc.
IRS publication 501 is the relevant publication
Publication</a> 501 (2007), Exemptions, Standard Deduction, and Filing Information</p>

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<p>
[quote]
Yes, it is theirs, so there is nothing preventing them from giving it back to their parents. There may be tax implications, but in principle it is a lawful maneuver.

[/quote]
</p>

<p>I closed D's UTMA account 2 years ago. She is a minor and I had to sign all the paper works but they let me take it out and I converted it to a regular account.</p>

<p>Note, we did not do it for financial aid reason because our EFC is very high.</p>

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<p>Well, I know you CAN take it out; we have switched investments to different companies and kids have spent money on computers, summer programs, etc, but I have always carefully documented these expenses. I wasn't thinking the investment people would care if you took it out, but doesn't the IRS track when large sums are moved about? Everything I have read says it is illegal to take back those funds.</p>

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<p>Not sure. I don't recall they sent us any paper so we didn't have anything to file tax with. I also believe it's a UTMA account so the tax is paid already yearly. I relied on TurboTax and so I can always blame on TurboTax. :D.
I also have not been audited for years because the running joke in my family is that if we get audited, the IRS has to give us back money. We always pay a lot of taxes. So we'll see.</p>

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<p>When we closed the UGMA account, no one asked us any questions. I just called and they sent a check. It is still her money, and as with my older D, they use it for whatever we approve them to use it for: a spring break trip, college books, a car (needed for older D to work). In our case, we were only talking about $5K for older D and $3K for younger D, so we weren't moving any huge amounts.</p>

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<p>A UGMA account, or in some states, a Uniform Transfer to Minors Act (UTMA) account, is a custodial account which allows parents to irrevocably give assets to a child for tax benefits and still maintain control of the assets while the child is young. The child does get full control when he or she reaches the age of majority (ages 18-21 depending on the state). It is an inexpensive and simple alternative to a trust.</p>

<p>Funds invested in an UGMA or UTMA account (Uniform Gift to Minors Act/Uniform Transfer to Minors Act) belong to the minor. The custodian has a legal obligation to use the funds solely for the benefit of the minor.</p>

<p>
[quote]

It is not possible to transfer money back to the parent from a child's custodial account because the original transfer was an irrevocable gift. Once the money has been given to the child, it is owned by the child. The child does not have the capacity to gift the money back to the parent, and the custodian would be violating his or her fiduciary responsibility if he or she transferred the money back into his or her own name or used it for his or her own personal benefit. (If a custodian does this, or otherwise behaves in a fashion that the IRS interprets as indicating that no gift was actually ever made, the custodian would owe back taxes at his or her rate, plus penalties. Also, the child could sue to recover the funds.)</p>

<p>However, nothing prevents the custodian from spending the money for the benefit of the child, so long as the expenses aren't "parental obligations" or otherwise benefit the custodian. Parental obligations are expenses a parent is normally expected to provide for his or her child, such as food, clothing, medical care and shelter. But if your child wants a computer or to go to summer camp, it is usually acceptable to spend the child's money on those expenses. Likewise, you can spend the child's money for the child's college education. The parent can then set aside some of his or her own money in a college savings account owned by the parent. Obviously, this only works if there are non-parental obligation expenses that the parent would otherwise have provided for his or her children. Attempts to undo an UGMA transfer in this fashion should only be done in consultation with a qualified accountant. </p>

<p>

[/quote]
</p>

<p>FinAid</a> | Saving for College | UGMA & UTMA Custodial Accounts</p>

<p>Also note that when taking money out of a UGMA, any capital gains are considered income for the student. For example, if a student has $20,000 in a UGMA, of which $5000 is in unrealized capital gains, then when these gains are realized this gives the student an asset of $20K (= assessed value of .20 * $20K = $4000) plus income of $5000, which lowers the student's EFC by $9000. This is why it's best to realize any capital gains the year before the FAFSA base year, rather than having them show up as income on the January FAFSA.</p>

<p>What I've done is set up a custodial (student-owned) 529 and transferred UTMA money directly to it, in order to draw down the UTMA. In addition, I've taken money out of the UTMA to pay my sons' income tax bills, in exactly the amount of the tax, so that there's no question that the money was "theirs". Each of these methods of reducing UTMA balances is legal.</p>

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<p>swimcatsmom, Many thanks for the information.</p>

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<p>Hi, All, As I understand it, Room & board is not deductible with Hope / Lifetime Deductions Plus since I received a Sate tax deduction when I deposited the money into the 529 I do not get a tax break again for this money.
So, I will use $2200 cash to get the full Hope deduction and then use 10K out of my 529 accounts for room and board.
Now I am not sure if there is a federal deduction for the 529 - 10k base money compared to the interest income that the money earned in the 529 accounts.</p>

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<p>Interesting thread. I just moved my meager 529 account from a broker managed platform to a self-directed one. In doing so, I found there were actually two accounts: one consisting of basic 529 contributions and the other, an UGMA/UTMA account. Apparently, my sister-in-law set up the UGMA/UTMA for the benefit of my daughter shortly after she was born. It's got around $2K in it. The folks running the self-directed 529 plan say I can just transfer the UGMA/UTMA money into the regular 529 contributions upon request. </p>

<p>My question is, will this transfer of the UGMA/UTMA funds be considered a taxable distribution or withdrawal for my daughter? Vballmom, you suggested the timing of this transfer is important with respect to FAFSA. If the transfer would be taxable and I wished to postpone it at long as possible, in what year of school (e.g. sophomore, junior) would be the latest year I could transfer it without it affecting FAFSA?</p>

<p>For that matter (and pardon the numerous questions) in terms of FAFSA, which is preferable: UGMA/UTMA account in my daughter's name or basic 529 account in my name? From what I've read here, I'm concluding that it's not favorable to have assets in my daughter's name. Thanks so much.</p>

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<p>
[quote]
My question is, will this transfer of the UGMA/UTMA funds be considered a taxable distribution or withdrawal for my daughter?

[/quote]

If there are capital gains or other such dividends/interest in the UGMA/UTMA account, then liquidating the account will cause a taxable distribution.</p>

<p>I would transfer the funds in sophomore year to be absolutely safe for FAFSA purposes.</p>

<p>For FAFSA/Profile purposes, it is more advantageous to have the money in your name. Financial aid consider less of it to be "available"to pay for college.</p>

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<p>A couple of clarifications for Stosh80. Typically you can't move funds from a UGMA to a parent-owned 529. The correct move would be from a UGMA to a child-owned 529. The reason for this is that parent-owned 529 plans, even those noted as "for the benefit of child #1", can be transferred to another plan which is "for the benefit of child #2". This transfer from child 1 to child 2's 529 is perfectly legal when it's all parent-owned money. It's not legit when it's the child's money, which legally the original UGMA money is. Be sure you talk to the folks running the 529 again about this. It's very easy to set up a child-owned 529.</p>

<p>Secondly, when you realize capital gains by selling stock/mutual funds in the UGMA, you pay tax on the difference between the purchase price and the sale price (= realized capital gains). Be sure that if interest & dividends have been reinvested in the UGMA over time, you have the correct cost basis. If your sister put in $1000 originally and there were no reinvested interest & dividends, your gain would be ($2000 - $1000) a total of $1000. However, the more usual scenario is that interest & dividends have been reinvested, so your cost basis would most likely be higher than $1000. This is a good thing because it means your realized capital gain is less and your (daughter's) taxes on that gain will be less. You'll need to look at your old statements, or sometimes the mutual fund company has kept a running total of the cost basis and you can use that.</p>

<p>Hope this all makes sense - it's complicated!</p>