When beginning to plan for a child’s future or when evaluating a current savings plan, many families often ask, “What are the differences between UGMA and UTMA accounts, 529 college savings plans, and prepaid tuition plans and what should I use?”
The key to answering this question lies first, in understanding the types of accounts available to help with saving for a child’s future along with their pros and cons. After which it’s easy to understand how the “tax cuts and jobs act.” being signed into law has made many 529 plans more attractive for parents and families.
- Uniform Gift to Minors Act (UGMA)/ Uniform Transfer to Minors Act (UTMA): An UGMA/ UTMA is common type of trust for account used that allows securities to be purchased on the behalf of minors. Simply put they are custodial accounts established at a financial institution by an adult (typically a parent or grandparent) for the benefit of a minor child.
The assets inside both UGMA and UTMA accounts are not limited to the use for higher education and maybe used to pay other expenses for a child.
The major drawbacks typically associated with UGMA and UTMA accounts have been the end of ability to change the beneficiary on the account and the requirement for the assets to be transferred into the name of the minor when they turn the age of majority. Depending on the state you live in the age of majority could be 18 or 21.
This means once a UGMA or UTMA Account has been set up you could not change minor child’s name on the account to another sibling or child even if the minor child listed no longer needed the funds in the account. Read more: Custodial Accounts
Prior to the creation of 529 plans, UGMA and UTMA accounts for the most common and popular with families planning for child’s education. Many families are now converting these accounts to a section 529 plan. These 529 plans are titled “Custodial Section 529 plans” since the funds in them came from UGMA and UTMA accounts. The custodial section 529 plans the assets Will still transfer the assets to the name of the child once they meet the age of majority. Typically 18 or 21 depending on the state you live in. If you are considering converting a UTMA/ UGMA be sure to check with your trusted tax advisor prior to converting to ensure you understand all your options and the implications.
- Section 529 prepaid tuition plan:Prepaid tuition plans allow the account holder to purchase tuition credits at the present price even though they will not be used until sometime in the future, when tuition costs will have most likely increased. These plans are state sponsored and only available in some states. However, it is possible to participate in a prepaid tuition plan outside of the account holder's current state of residence. Read more: 529 Prepaid Tuition Plan .
- Section 529 college savings plan: section 529 college savings plan allows the account holder to establish an account for the beneficiary and to use the money to pay such expenses as tuition, room and board, books, and fees. The assets inside the account maybe invested in stocks, bonds, and mutual funds. Any gains on the assets would not be subject to tax when withdrawn from the account, as long as the funds are going to pay for qualified higher education expenses. Read more: 529 College Savings Plans.
Under prior law, assets held in college savings accounts under IRC 529, known as 539 plans, could only be used for “qualified higher education expenses” these qualified higher education expenses were typically defined as tuition, fees, books, supplies, and required equipment at colleges, universities, vocational schools, or other postsecondary schools. The new “Tax Cuts and Jobs Act” expands the definition of “qualified higher education expense” to now include tuition at an elementary or secondary public, private, or religious school. Giving more flexibility to the use of funds inside of the savings accounts.
This expanded definition of “qualified higher education expense” made the already popular section 529 savings plan even more attractive to families seeking to save for children’s education and allowing for increased tax savings. If you have questions regarding how is investing at a 529 college savings plan may benefit your family and fit into your current financial plan, contact your financial advisor or Certified Financial Planner™. Read more: The difference between a financial advisor and Certified Financial Planner™
This information is general in nature and may be subject to change. Financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant.
Securities offered through NMS Capital Advisors, LLC, Member FINRA/SIPC. Advisory products and services offered through Castle Wealth Advisors, LLC, a Registered Investment Advisor. NMS Capital Advisors, LLC and Castle Wealth Advisors, LLC are unaffiliated entities.