If you are investigating how to save for your child’s college education, you have probably heard of 529 Plans and you may also know about the Coverdell ESAs. But are you familiar with the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA)?
These lesser known college saving vehicles are custodial accounts that allow you to put aside a substantial amount of money in your child’s name while benefiting from your child’s tax-advantaged status.
The UGMA/UTMA account is a simple contribution or transfer of assets, such as cash, bonds, mutual funds, CDs, and even real estate, into your child’s name. Your child is listed as the beneficiary on the account until the age of 18, at which point ownership of the account transfers to your child as well.
FAQs about UGMA/UTMA
>> What if my child doesn’t go to college?
>> Can I take back ownership of the account?
>> Am I limited in how much I contribute to the UGMA/UTMA?
>> Who can make contributions to the UGMA/UTMA?
>> Do my earnings grow interest-free, like in a 529 Plan?
>> I already have a 529 Prepaid Tuition Plan. Can I still contribute to a UGMA/UTMA?
>> How will the money I set aside in a UGMA/UTMA affect my child’s financial aid award?
What if my child doesn’t go to college? What happens to the money?
Once your child reaches the age of maturity, he or she becomes the owner of the account.
Which means, the money in the account can be used to pay for college — or to buy a car, or to travel around the world, or anything else your child can dream up.
Herein lays both the advantage and the disadvantage of an UGMA/UTMA account: Your child doesn’t have to use the money for college, but you don’t legally have the right to say whathe or she does use it for.
Despite the loss of financial control, a number of parents still choose to invest in an UGMA/UTMA account because of the flexibility it affords them.
I don’t want my kid wasting his money on frivolous things. If I see that he’s doing that, can I take back ownership of the account?
Unfortunately, no. The transfer of funds to a UGMA/UTMA is considered an irrevocable gift. You cannot transfer ownership of the money back to yourself, nor can you transfer the beneficiary of the account to someone else.
Am I limited in how much I contribute to the UGMA/UTMA?
No. Unlike the Coverdell ESA, which limits you to an annual contribution of $2,000 per child, the UGMA/UTMA accounts allow you to contribute up to $13,000 per year (or $26,000 for couples filing jointly) per child without incurring gift tax. Contributions above $26,000 will incur the gift tax.
Who can make contributions to the UGMA/UTMA?
Anyone can contribute to an UGMA/UTMA account, including grandparents, relatives, friends, and even the child. And there are no income restrictions limiting how much any of these individuals may give.
Do my earnings grow interest-free, like in a 529 Plan?
Not exactly. Unlike a 529 Plan or an Educational Savings Account, the capital gains on a UGMA/UTMA are taxable. But, the first $900 that your account earns every year is exempt from federal income taxes. And any gains between $901 and $1,800 are taxable at your child’s significantly lower marginal tax rate (as long as he or she is younger than 19 or older than 19, but currently attending college).
Annual income from gains above $1,800 is taxed at the parents’ marginal tax rate. If your child is not presently enrolled in college and he or she is older than 19, all gains are taxed at his or her marginal rate. Since the rules are a bit complicated, it is a good idea to consult with an estate planning professional before opening an UGMA/UTMA account.
I have already funded a 529 Prepaid Tuition Plan. Can I still contribute to a UGMA/UTMA?
Absolutely. Perhaps you want to put aside extra money to cover your child’s living expenses at school. Or maybe you just want to make sure that your child’s education is covered even if he or she attends college out of state. Whatever the reason, you can always contribute/transfer funds, with the same $13,000 limit per child for single filers, to an UGMA/UTMA account. The same rule applies for those of you with a 529 College Savings Plan or a Coverdell ESA.
How will the money I set aside in a UGMA/UTMA affect my child’s financial aid award?
Since an UGMA/UTMA account is considered your child’s asset, its value will be assessed for financial aid purposes at the higher expected contribution rate of a student. In other words, a large UGMA/UTMA account could hurt your child’s chances of getting financial aid. If you are concerned about this, you might want to consider investing in a 529 Plan or an Educational Savings Account instead.
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