In the past, Uniform Gift to Minors Act accounts, or UGMAs, were a great way to transfer assets to your child to help finance their education. However, in 1996 another vehicle became available, the 529 plan and has gained much appeal. But before you decide which plan is best for your child or whether to transfer UGMA funds to a 529 plan, you should consider some of the pros and cons.
UGMA Pros: Simple – UGMAs are as easy as opening a bank account or investment account – no attorney fees necessary.
No penalty – if not used for college – assets may be used for any purpose that benefits the child. It may be used for private school, a car, laptop, etc., but it does exclude parental obligations such as food, clothing and shelter.
Flexibility – UTMA allows for investment flexibility as you may choose from wide selection marketable securities.
No Contribution Limit – there is no limit to the amount you can contribute. The federal gift tax exclusion is currently $13,000 per year for an individual and $26,000 for married couples. Unlimited Participation – anyone, parent, grandparent, or friend can contribute for a beneficiary.
UGMA Cons: Irrevocable – once a contribution is made it must be used for the benefit of the child Loss of Custodianship – the child is legally entitled to the account at the age of majority, (between18-21 varies between states), and will have complete control of the funds. No Tax Benefits – there are no tax benefits to contributions.
Financial Aid – the assets in a UGMA will be counted as assets of the child when applying for financial aid which can potentially jeopardize your child’s chances of receiving financial aid.
529 Pros: Tax Free – all earnings and withdrawals are free from tax as long as they are used for qualified expenses.
Contributions – you can pre-load a 529 for a child with five year’s worth of annual gifts. There are no further gifts allowed for 5 years by the contributor.
Transferable – the funds can be transferred from one child to another, so if one child chooses another path, you can use savings for another child’s tuition.
Control – the owner of the account retains control over the funds regardless of the age of the child. Portable – you may transfer the money from state to state and use toward the college of your choice.
529 Negatives: Penalties – there is a 10% penalty on withdrawals not used for qualified expenses. Limited Options – restricted to options in particular state plan.
Expenses – charges for managing and administering the account as well as fees for the mutual funds will be incurred.
Saving for the future of your child can provide both peace of mind and financial benefits. Before making any decisions about which account is right for you, be sure to talk to your tax and financial professionals.
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