Should you convert your child’s UGMA/UTMA into a 529 college savings plan?

If you’ve set up a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) and are concerned about your child’s eligibility for financial aid, you may want to consider converting those assets into a 529 college savings plan.

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Why convert it to a 529?

Because an UGMA or UTMA account is reported as the student’s asset on the Free Application for Federal Student Aid (FAFSA), while 529 accounts are treated as the parents’ assets. The expected family contribution, which is a calculation made by FAFSA to determine how much a family can afford, is heavily weighted toward income. As much as 47% of the parents' income and 50% of the student's are counted on FAFSA, as compared with up to 5.64% of parental available assets and 20.0% of student's assets. 

Here are some additional pros and cons about making the switch to a 529 college savings plan.

The pros

  • Withdrawals are tax free if used for qualified expenses. The money in a 529 account can be withdrawn tax free if used to pay for qualified educational expenses, such as tuition, room and board, and supplies.*
  • Contributions grow tax free. The gains in 529 plans aren’t taxed unless a nonqualified withdrawal is made. With an UGMA or UTMA, the minor child is responsible for taxes on any earnings and gains.

The cons

  • You can’t directly transfer the assets. You’ll need to sell the assets in the UGMA/UTMA before moving the money to the 529, which may trigger capital gains taxes.
  • Your investment options may be more limited. UGMAs and UTMAs typically permit a wider range of investments—including individual stocks, bonds, and even real estate. The options for most 529 college savings plans, however, are generally limited to individual mutual funds and/or fund portfolios. 
  • You can’t change the beneficiary. Just as you can’t change the beneficiary of an UGMA/UTMA account, you also can’t switch the beneficiary on the UGMA/UTMA 529. However, once the beneficiary of the account reaches adulthood—as defined by your state of residence—and becomes the owner, he or she can change beneficiaries. 

Another key consideration: If you’re planning to convert assets into a 529, you may not want to contribute additional assets into that account because money gifted to the beneficiary of an UGMA/UTMA 529 is irrevocable.

Before making any decision on converting an UGMA/UTMA to a 529 account, be sure to consult with your financial professional and tax advisor.