Last week, we launched a four-part series about the best tax-preferred college savings vehicles. So far we have covered three out of the four: 529 College Savings Plans, 529 Prepaid Tuition Plans, and the Coverdell Educational Savings Account. Be sure to review those posts, if you didn’t get a chance to read them yet.
Today we are rounding out the series with the least well known of your tax-preferred college savings options, the Uniform Gift to Minor/Uniform Transfer to Minor Act. In short, UGMA and UTMA are custodial accounts that allow you to save a substantial amount of money in your child’s name for the purpose of college… or anything else… while benefiting from your child’s lower tax bracket.
(By the way, I keep emphasizing “tax preferred” because, of course, you are welcome to save for college in a regular old savings account, or a CD or a mutual fund. The thing is, you won’t get any tax savings. If you use one of the four vehicles we covered here, however, you will. And saving on taxes means more money to save for college!)
UGMA/UTMA
What is it: A simple transfer of assets into your child’s name, which he or she can use for educational expenses upon the age of maturity. The assets can be anything worth money — cash, CDs, mutual funds, or even real estate.
Pros: High contribution limit per beneficiary — $13,000 per year for single filers or $26,000 per year for joint filers; no income restrictions on contributions; anyone can contribute to account; first $900 in annual earnings are tax-free
Cons: Originally contributor has no financial control once the beneficiary reaches the age of majority; ownership cannot be transferred as it is considered an irrevocable gift
Bottom line: Once the only tax-advantaged way to save for college, the UGMA/UTMA has fallen out of favor now that 529 Plans and ESAs offer more financial control, more flexibility and better tax savings.
Want to know more? We recently updated the Financial Aid Finders section on Saving for College to include an in depth review of the UGMA/UTMA accounts, covering frequently asked questions such as “Do my earnings grow interest-free, like in a 529 Plan?” and “How will the money I set aside in a UGMA/UTMA affect my child’s financial aid award?”
So tell us: Are you currently investing in a tax-advantaged college savings vehicle? Which one did you choose and why?