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529 vs UGMA & UTMA! Which one is a better deal for college? - YouTube
Channel: ClientFirst Strategy
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- What's better, a 529
college savings plan
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or an UTMA/UGMA custodial account
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for your child's future college expenses?
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(upbeat electronic music)
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And we're back.
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My name is Mitch Goldberg.
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I'm a financial advisor
and a business owner.
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My videos are all about
financial education
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and today what I want to do is I want
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to compare a 529 college savings plan
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to an UTMA or UGMA account,
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Uniform Gift to Minors
Act or Uniform Trust
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to Minors Act account, in other words,
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a custodial account.
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Which one is better for
saving money for college?
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Well the way it works is this,
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for the FAFSA application, that's the
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Free Application for Federal Student Aid,
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you go online, you fill
out the application,
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and you have to add up your assets
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and your child's assets.
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So parents' assets that count
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toward the FAFSA application,
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they can reduce the amount of money
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that your child is eligible in terms
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of federal financial aid, by 5.6%.
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But if money is held in the child's name,
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that impacts the child's eligibility
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for financial aid by 20%.
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So right there, there is
about a 14.4% difference.
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That's a huge difference.
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So to me, if you're going to save money
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in a UTMA or UGMA account,
that's a custodial account,
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and the reason you have that is
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because minors are not actually allowed,
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they're allowed to have money,
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but they actually have to have
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a custodian to manage it for them.
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So if you have money in the child's name,
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there is quite a penalty when it comes
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to applying for financial aid,
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of 20% against your child's ability
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to collect as much financial aid
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as they possibly can.
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The thing about money in a 529 plan,
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it's in the parent's name.
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It's considered an entity of the parents,
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or property of the parents,
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and that is, again, a 5.6% penalty
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against potential federal
financial student aid.
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And not to overlook another key benefit
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of the 529 plans is that the assets
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inside these plans grow tax-free
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as long as the distributions are used
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to pay for qualified college expenses,
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such as room, board, and tuition.
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This, as opposed to an UTMA/UGMA account,
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where the assets that grow in the accounts
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are subject to taxes along the way,
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and when you finally make withdrawals
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from these accounts,
you could be subjected
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to both long-term and
short-term capital gains taxes.
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And another point I want to make,
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that if parents do have
an UTMA or UGMA account
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in their child's name and they're planning
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on using that money for college,
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it would be, to me, highly advisable
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to move those assets into
a 529 college savings plan.
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It'll just be titled as a UGMA or UTMA 529
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college savings plan and that's fine.
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You still get the same benefit
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in terms of a lower penalty
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against potential federal financial aid.
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The only difference is that once
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the child reaches age of majority,
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let's say 21 years old in a lot of states,
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the child would then
take possession ownership
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of the 529 plan with him or herself still
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as the beneficiary, as opposed to
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the 529 plan without the
UTMA or UGMA attached to it.
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The parent still controls those assets.
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So I hope this helps you out
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in terms of why I think it's better
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that if you have money, that you are
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designating for future college expenses
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for your child, the 529 plan by miles
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beats the UGMA/UTMA accounts.
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If you have any questions
you can certainly
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reach out to me.
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All of my contact information can be found
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at ClientFirstStrategy.com.
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If this video did help you out,
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please give it a thumbs up.
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Please subscribe to my YouTube channel.
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And until next time, see you soon.
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