For most families, a 529 Plan is a great college funding solution. After all, it permits tax-free savings growth and avoids taxation of earnings…if…withdrawals are used for ‘qualified’ expenses such as tuition, room and board, and fees. Additional benefits include no income limit, a high limit on contributions, and, in most states, a tax deduction for contributions to the plan.
Despite such benefits, a 529 Plan isn’t right for everyone. Some people have concerns about tax consequences (income tax plus 10% penalty on earnings) if a child doesn’t attend college and another sibling isn’t available to use the funds. Others simply want more control.
So…what’s a person to do?
One popular alternative is a custodial account, known either as an UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfers to Minors Act) account. Under these arrangements, a parent, for example, deposits money into the account and subsequently manages it for the child’s benefit until he or she reaches the age of 18 or 21, depending upon the state.
For parents who desire total flexibility regarding how funds may be used, a custodial account works, because withdrawals for travel, ‘non-qualified’ educational opportunities, or other purposes will not trigger taxation or penalties on earnings.
For parents who object to investment restrictions imposed by 529 Plans, a custodial account permits broader investment choices including more mutual funds, individual securities, and even unique assets. For some families, this is a huge benefit.
Naturally, custodial arrangements have disadvantages: modest tax consequences, being treated as a child’s assets for financial aid purposes, and unfettered access to account assets upon attainment of the age of majority. Thoughtful planning can offset these potential problems.
Which plan is right for you…529 or UTMA/UGMA? Talk to your Wealth Manager or Financial Advisor today!