A Financial Revolution 


February 03, 2006
Moving Money from an UTMA/UGMA Account to a 529
Following my post about creating an UTMA/UGMA custodial account for a minor, Janet posted a good question: Once you've put money into a custodial account, can you transfer it to a 529 plan? The short answer is yes and no. Regardless of your state laws, one thing remains constant: placing money in an UTMA/UGMA account for a child is a completed, irrevocable gift. Although Janet may act as custodian for the account, she can only withdraw funds for the child's expenses (e.g., education, orthodontia, summer camp.) I know of only two ways to move money from an UTMA/UGMA account to a 529 plan.

First, a normal 529 won't work because Janet, the custodian, could change beneficiaries (that goes against the concept of an irrevocable gift.) However, some plans allow for UTMA/UGMA 529s. While I'm not an expert and I advise consulting a tax attorney, I believe that the UTMA/UGMA 529, like the standard UTMA/UGMA, will also be considered the child's asset for computing financial aid. In addition, the capital gains may be taxed following the transfer. It is also important to note that an UTMA/UGMA 529 carries the same restrictions as the normal UTMA/UGMA and it overlays the restrictions of the 529 (e.g., for educational expenses only.)

The better method for moving money from an UTMA/UGMA to a 529, Roth IRA, savings account, or piggy bank is to drain down the UTMA/UGMA by using the money for the benefit of the child while they are young. As the money is drained down, put an equal amount of money into the new non UTMA/UGMA account. When pursuing this approach, be sure to keep records of how the money is spent in case the IRS asks.

If possible, I would recommend leaving some money in an UTMA/UGMA account. It is a good way to lower the family's tax bill, teach the child about money - interest, investing, saving - and provide the child with a safety net when they are older.


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