There are so many ways to save for our children. Two of the most common ideas we see are the 529 Plan, and the Unified Transfer to Minors Account (UTMA). Depending on your state, the UTMA may also be called a UGMA (Unified Gift to Minors Account).
While there are some major differences in these strategies, it depends on your family and how you want to plan for your child’s savings. UTMA/UGMAs are usually depicted as the more flexible option, but that may not be the case for you plan.
UTMA/UGMA
| Advantages | Disadvantages |
|---|
- May be withdrawn at any time without penalty for the direct benefit of the beneficiary.
- The account is taxed at the child’s tax rate up to the year’s threshold
- Anyone – grandparents, parents, relatives, or friends may contribute.
| - It is reported as a “Student Asset” when applying for College Financial Aid aka FAFSA (20% rather than 5.54%)
- Annual Tax Submission each year especially as the account grows
- Must relinquish custodianship when beneficiary turns 21 (or liquidate to parents for benefit of beneficiary)
- No tax credit for contributions
- Beneficiary cannot be changed
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|
529 College Savings Plan
| Advantages | Disadvantages |
|---|
- Tax Deferral for the life of the account
- Tax Credit or Deduction available depending on State
- Withdrawals for K-12 Expenses (up to $10k), College Expenses, Education Room & Board, Education Equipment/Supplies are tax-free
- Transfer to a family member (parent, sibling, cousin, child, etc.) with no tax or penalty or back to yourself for education expenses
- Parent has control over the asset – no required transfer to beneficiary
- Reported as “Parent Asset” when applying for Financial Aid aka FAFSA (5.54% rather than 20%)
- Anyone – grandparents, parents, relatives or friends – may contribute
- May potentially be converted to a Roth IRA up to $35,000
| - Withdrawals NOT for Tuition, Room & Board, and Supplies (Non-Qualified Expenses) are taxed and penalized on the gain of the account (Contributions not taxed or penalized)
- Reimbursements from 529 Plans must be reported each year to accountant for proof
- If living off-campus, the Room & Board is capped to the institutions "Average Cost of Living"
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Citation: https://www.irs.gov/taxtopics/tc313
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state's 529 Plan.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
