UTMA, UGMA and 529 Plans Compared - YouTube

Hi everyone. I'm Ara Oghoorion with ACap Advisors  and Accountants, and welcome to another edition  

of the ACap ReCap, where we go behind the blog  and answer some of your most important questions.  

Today we're going to talk about the  differences between a UTMA account,  

a UGMA account and 529 plans. As parents, you're  always wondering which is the best plan for my  

child, or which one's the best plan for me to  help my child either save for college or to help  

them get started in life. And today we're going to  talk about all three of those plans and help you  

to decide which one is the best option for you.  But, before we do that, remember to subscribe,  

like and share our channel, and if there's a  topic, that you want us to cover, be sure to  

include it in the comment section below or send us  a message, and we will cover it in a future video.

So, what I want to do is go through all the  different features of each account, so that way,  

as a parent, you can make an informed decision on  which account is best for you, because not every  

account is going to be the best option for you. In  some instances, a UTMA account may be better for  

you, than a 529 plan or vice versa. So, let's go  ahead and get started! I'd say the first criteria  

to consider is who owns the account for a UTMA  or a UGMA account. It's actually the the child,  

that owns the account, but it's the parent, that  controls it. So, the parent is the custodian of  

that account, but it's a child, that actually  owns it. On a 529 plan, on the other hand,  

it's the parent, that owns the account, and then  the child is the beneficiary. So, the child has  

no claim on that account or the beneficiary has  no claim on that account. The parent is the one,  

that owns a 529 plan. Now let's talk about what  changes as a parent you're allowed to make to  

each of the accounts. On a UTMA or a UGMA account,  as a parent, you cannot make any changes to that  

account, meaning you cannot once you put money  into the account, you cannot withdraw it out,  

unless it's for the benefit of the child. So,  contributions you make to a UGMA or UTMA account  

are irrevocable: once you put them in there,  you cannot take it out, because it belongs to  

the child. On the 529 plan, however, once you put  the money in there, again, because you control the  

account as a parent, it is your account, you can  change the beneficiary to any time you want. So,  

if you want to change it from one child to  another, you can do that. If you want to change  

it from one child to a nephew or a niece or a  grandchild, you can do that or a great grandchild,  

as well, you can do that, as well, without any  tax or penalties. But on the UTMA or UGMA account,  

unfortunately, you cannot do that: once you put  the money in, it's irrevocable. Now, let's talk  

about what are some allowable investments you can  have in each of the different types of accounts.  

In the UGMA account you can have stocks, bonds,  any type of marketable securities you can have in  

a UGMA account. But, what makes the UTMA account a  little more appealing, is that with a UTMA account  

you can have other types of investments in there,  that are non-marketable; such as real estate  

or art or any other type of non-marketable  security you can have in a UTMA account,  

that makes it more appealing, than a UGMA account.  On the 529 plan, however, the types of assets you  

can have in there, are typically limited to  again marketable securities. Most states are  

the ones that sponsor 529 plans, and the only  allowable investments you have in there are  

mutual funds and in some cases exchange exchange  traded funds. Now, let's talk about the taxation  

of the money that's actually in each one of these  accounts. If you're in a UTMA or a UGMA account,  

the first 1,050 is tax is tax free; there's no tax  on that, the next 1,050, and this amount changes  

every year based on changes in IRS rules, but the  next 1,050 is taxed at the child's rate, which is  

typically lower, and then any earnings above 2,100  are taxed at the parental rate, so this is where  

the kitty tax comes in. If the if the UTMA or  the UGMA account earns more than $2,100 in a year  

through dividends or interest, then that income  is taxed to the child at the parents tax rate.  

The 529 plan, however, there's no taxation, the  money grows tax-free and it the withdrawals are  

tax-free, as long as they're used for qualified  distributions for education. Now what's an  

allowable qualified distribution is a pretty long  list: it includes tuition, room and board, books,  

computers, there's a lot of things, that fall  under a qualified distribution of the 529 plan.  

Now let's talk about some of the expenses,  that you can use these accounts for to pay  

for the child. We'll start off with the 529  plan first, because on the 529 plan you're  

a little more limited, you're only allowed to  use the money for educational purposes, however,  

that list is pretty long. So, for educational  purposes you can use it for tuition, obviously,  

you can use it for books, you can use it for  computer equipment, such as internet or computers  

for your child, so it's a pretty long list of  what you can use a 529 plan for eligible expenses.  

But the UTMA and the UGMA have a little more  flexibility on what you can use the money for,  

but they still have to only be used for the  benefit of the child. So, obviously, you can use  

it for education, but you can go beyond that and  you can use it for to buy clothes for the child,  

you can use it for, you know, if you want to  send your child away for school or you can use  

it for weddings, you can use it to buy a new car  for them, clothes, really there's a long list of  

things you can use a UTMA or UGMA money for, but  the bottom line is it has to benefit the child,  

and if you don't have it benefit the child,  it can have severe tax consequences for you,  

because, again, the money belongs to the child, as  a parent you're just a custodian of that account,  

until that child turns the age of majority. A  really important factor of a 529 plan versus  

a UTMA or UGMA account is what happens to the  account once that child is no longer a child.  

And in a UTMA in a UGMA account the the money  transfers to the child, there's nothing you  

can do about it, the parent actually have no  access to to the account, once that account  

has been transferred to the child, and that  typically happens between the ages of 18 and 25,  

depending on the state, that you live in, because  it's the state, that dictates the age of majority.  

Now, on the 529 plan there's no transfer of that  asset to the child, because again the account  

does not belong to the child, the child is only  the beneficiary, and as a parent, the owner of  

that account, you decide who that beneficiary  is. So, if the child turns 18, and you decide,  

you know, they don't they don't need the money,  or they don't want to go to college, you, as a  

parent and the owner of that child, can change  the beneficiary to anybody else that you want,  

but, unfortunately, with a UTMA or a UGMA account  you cannot do that: once the child turns the age  

of a majority, then you have no control over that  account again, and the child, who is now an adult,  

will have complete control of that account. Many  times parents want to know what impact these  

accounts will have on the child's financial  aid eligibility. Well, on the UTMA and the  

UGMA account, because these accounts belong to the  child, they're going to be considered the asset of  

the child and used as a way of paying for college,  whereas on a 529 plan, it's going to be considered  

a parental asset and not a child asset. One of the  benefits of the UTMA account or UGMA account over  

the 529 plan is the amount of contributions you  can make to these accounts. So a UTMA account,  

a UGMA account there's no limit on how much money  you can put in there. Remember, keep in mind,  

that there's taxation of that money, if it earns  income, and depending on how much income it earns,  

the child is going to get taxed either at their  tax rate, at your tax rate or no taxes at all.  

Now, the 529 plan, on the other hand, has  income limitations or not income limitations,  

but contribution limitations, and that varies  by state, but those contribution limitations  

are really high, typically they're in a three,  four, five hundred thousand dollar range, which  

is more than enough to pay for college, despite  the escalating college costs. The last thing we  

need to cover are gift tax rules related to the  UTMA, UGMA, and, obviously, the 529 plan. If  

under current law, if you give anybody $16,000  or more, you have to file a gift tax return,  

and it can whittle away at your lifetime exclusion  for taxes. With a UTMA account and a UGMA account  

you can give up to $16,000 into these accounts,  without having to file a gift tax return. Now,  

the same applies with a 529 plan: you can give up  to $16,000, but a big difference with the 529 plan  

is that you can front load it up to five years.  So, as a parent, you can put five years worth  

of contributions into this account of $16,000,  and there's no need to file a gift tax return,  

and it's $16,000 per parent, so one parent  gives sixteen, another parent gives sixteen,  

that's $32,000 you can put in per year, per  child into a 529 plan and you can front load  

it up to five years, without having to file a  gift tax return. As we just discussed, there's  

a lot of differences between the UTMA, UGMA  and the 529 plans, but that doesn't mean, that  

one plan is going to be best for everyone,  it really depends on your own circumstances,  

and what you're trying to accomplish. So, for  example, if you don't want your kids to have a  

big chunk of money, when they turn 18 or the age  of majority, maybe the UTMA and the UGMA accounts  

are not the best choice, because you're going  to have no control over that, but if your money,  

if the money, that you're earmarking for them is  going to be for college, and you want to have some  

control over that, then a 529 plan may be the best  choice for you. Regardless of which one you do,  

be sure to talk to your CPA and your financial  advisor ahead of time, so that way they can give  

you the best advice that's suitable for your  own needs. Thank you for joining me again! And  

remember to subscribe, like and share our channel,  and if there's a topic, that you want us to cover,  

be sure to include it in the comment section  below, and we will cover in a future episode.