UGMA/UTMA & 529 Plan

Parents Forum
1

<p>I have a 1 year old baby. I am new to education savings. I am in California.</p>

<p>I am trying to figure out where to invest money for her education. We are planning to send her to a private school from Kindergarden to grade 12. </p>

<p>Should I be putting some money in a UGMA/UTMA plan to pay for her private school education from Kindergarden to grade 12? Is there any advantage of doing this? Am I allowed to use money from a UGMA/UTMA plan to pay for private school?</p>

<p>I read that the money put in the 529 plan could only be used for college education. So, I assume I will have to put separate money on a 529 plan to save for her college education.</p>

<p>Any feedback is appreciated.</p>

2

<p>Or is The Coverdell ESA a better choice to fund private school education for K to 12?</p>

<p>For The Coverdell ESA, my income does not qualify. Would I be able to open a Coverdell ESA under the child’s name instead?</p>

3

<p>I’m not a financial/tax guy so my perspective is that of an average Joe. I thought the primary advantage of UGMA was that the investment income up to a limit (before kiddie tax kicks in) is taxed at the kid’s tax rate which could be much lower than the parents’. So I personally don’t know much of an advantage vis-a-vis using it to pay school tuition other than that the investment income would be taxed less. As to whether it can be used for it, my layman’s interpretation is that as long as the money is used for the kid’s benefit, it’s OK. </p>

<p>One downside of UGMA is that if the money wasn’t fully used at a young age, the kid can decide to go to university of Woodstock, and I’m told it’s hard for you to do anything about it.</p>

4

<p>The age of majority in California is 18, so a child would take control of the UTMA at that age (if he or she knows about it). Some brokerages get the paperwork to the kids about a month before their birthdays, others just let the accounts ride and don’t do anything (I’ve had funds in both types).</p>

<p>The link below gives a good summary of the 2 types of accounts. </p>

<p>[Gifting</a> to Children: UTMA and 529 Plans](<a href=“http://www.danhallassociates.com/articles/gifting-to-children-utma-and-529-plans/]Gifting”>http://www.danhallassociates.com/articles/gifting-to-children-utma-and-529-plans/)</p>

<p>Also the gift tax exclusion limit is now $14,000 (the article is out of date). </p>

<p>One thing that’s not mentioned in the article is that UTMAs are considered to be student assets when calculating EFC (expected family contribution) for college financial aid, while 529s are considered to be parent assets. The current rules say that 20% of children’s assets are included in the EFC while only 5.6% of parents’ assets are included.</p>

<p>You can always roll the funds from a UTMA into a child-owned 529, so you don’t need to feel locked in to any one scenario for the long term.</p>

<p>The kiddie tax means that it’s no longer quite as advantageous to have money in the kids’ names as it used to be. Money in a 529 grows tax-free, but as you know it can only be used for higher education expenses (unless you’re willing to pay tax on the gains + penalty).</p>

5

<p>

</p>

<p>When we did the financial aid paperwork, we found that the 529 funds were treated as child’s assets. Maybe we filled it out wrong but IIRC, it was pretty clear that that was how it was.</p>

6

<p>For FAFSA the 529s are reported as parent assets. It’s possible that some Profile schools expect a higher percentage of funds in a 529 to be spent every year than the FAFSA formula does, but that would vary by school.</p>

7

<p>

</p>

<p>The above from question 89 on the fafsa.</p>

<p><a href=“https://fafsa.ed.gov/fotw1314/help/fotw43e.htm[/url]”>https://fafsa.ed.gov/fotw1314/help/fotw43e.htm&lt;/a&gt;&lt;/p&gt;

<p>I don’t know anything about UTMA/UGMA accounts but here’s what that question says about them:</p>

<p>

</p>

<p>As said above schools may treat them differently for institutional aid.</p>