UTMA vs. 529 Plans: Which is Best for Your Family?
By Kristina L. Foreman, JD, CTFA, Estate and Financial Planner and Timothy J. Gray, Associate Wealth Manager
A new addition to the family is always cause for celebration, though a common concern amongst parents and grandparents is, “how do we help plan for the educational future of our loved ones?” Two of the most well-known savings plans, the Uniform Transfer to Minor’s Act (UTMA) and 529 Plans, can help address this concern.
What is a UTMA Account?
The UTMA account was created as an efficient method to transfer wealth to a minor. A UTMA account is considered an asset of the minor but has a custodian appointed to control the assets until the minor reaches legal age, which is either 18 or 21, depending on the state. The custodian is usually a parent and is considered a fiduciary. Once the minor reaches legal age, they are entitled to the account in full. The UTMA account was created following revisions to the prior enacted Uniform Gift to Minor’s Act (UGMA). UTMA and UGMA accounts are similar, but UTMA accounts are able to hold a wider range of investment assets.
What is a 529 Plan?
529 Plans were created specifically to give families an opportunity to save for college and its rising costs. One of the many benefits of a 529 plan is that unlike a UTMA, a 529 is not considered an asset of the student, and therefore has a lower impact on a student’s ability to receive financial aid. There are two types of 529 plans: prepaid tuition plans and college savings plans. Prepaid tuition plans allow the contributors of the account to pre-pay tuition at a designated college or university, locking in the cost at today’s current pricing. Alternatively, a college savings plan allows individuals to contribute to an account that will pay for the beneficiary’s qualified higher educational expenses, without designating a specific college or university.
How they work:
UTMAs are often funded with the annual gift tax exclusion amount, which is $16,000 per donor for 2022. By keeping the amount under the annual gift tax exclusion amount, the donor does not have to file a federal gift tax return. For 2022, up to $2,300 of unearned income generated in a UMTA is taxed at the kiddie tax rate. Anything over that amount is taxed at the donor’s tax rate, which may be significantly higher. This particular tax structure was put in place to prevent custodians from using UTMAs as a tax haven.
529 Plans are also often funded with the annual gift tax exclusion amount. For donors who plan to contribute to a 529 plan, each donor can contribute up to $80,000 in one year for each beneficiary (or $160,000 for a married couple) without incurring federal gift taxes, as long as no further contributions are made for the next five years. 529 Plans earnings grow tax-free and are not taxed upon withdrawal as long as the funds are used for qualified expenses, which can include up to $10,000 per beneficiary, per year for grades K-12, depending on the state.
Which Savings Plan is right for me?
*529 accounts are counted as the owner’s asset and the expected family contribution (EFC) amount used when filing a FAFSA is factored at a much lower rate than a child-owned asset.
**A 529 account owner can change the beneficiary at any time without tax consequences as long as the new beneficiary is a member of the family.
Both 529 plans and UTMA accounts can help you achieve your planning goals. If your main objective is to save for education, the flexibility and increased tax benefits of a 529 plan may be the most beneficial. UTMA accounts may be best for non-educational purposes. As always, we advise consulting with your tax professional before making any decisions.
The team at Boston Financial Management is always available to answer further questions regarding your financial planning goals. Please call us at any time, at 617-338-8108.
Important: This alert does not contain any legal or tax advice. You should always consult with your attorney, accountant or other professional advisors before changing or implementing any tax, investment or estate planning strategy.
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Pursuant to IRS Regulations, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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