For parents who do not like the regulations of the 529 and Coverdell Account, check out another option called the Uniform Transfer to Minors Account. The UTMA is a savings account that does not have spending restrictions. The UTMA is a revised version of the Uniform Gift to Minors Act (UGMA) and has been adopted by every state except South Carolina and Virginia, who still employ the UGMA.
The UTMA is an alternative to having minors own stocks, bonds, or mutual funds. Through this account, money is left to minors who will have legal access to the funds once they reach maturation age. Maturation age ranges from 18-21 by state. In the meantime, the child’s custodian oversees the account. During that time, the money can be used to pay for the child’s expenses. Unlike the 529 and the Coverdell, expenses are not restricted to educational expenditures. However, purchases must benefit the child. Acceptable expenses range from camping trips to dance lessons. Essentials such as food, clothing, housing, and medical expenses, are not acceptable.
Once the child takes over the account, there are no spending restrictions. This is great for the kid, but scary for the parent. If you are uneasy about your child’s ability to make responsible financial decisions, this account is not a good option. The account cannot be returned to the giver, and cannot roll over to a sibling’s account.
Cash in a UTMA account is taxable. However, there are small tax incentives. For example, the account has child tax rates. Since children have little to no income, there will be little to no tax. Also, the first $950 dollars earned each year is not taxed for children under 18. The next $950 has a child’s tax rate which is lower than adult rates. When the yearly earnings exceed $1,900 adult tax rates apply. These tax incentives are not as good as the incentives for the Coverdell and 529, however there is no contribution cap so the UTMA has unlimited growth potential.
The UTMA does effect financial aid. Because the UTMA is in the child’s name, it will lower financial aid significantly. It is more efficient to tax the parent’s assets rather than the student’s. Assume that 35% of a child’s assets are put away for college. Only 5.6% of the parent’s assets are used for a child’s education. Therefore this account is a setback when student’s apply for financial aid.
If you do not want spending restrictions like on 529 and Coverdell plans, the UTMA is a good option. Keep in mind that you can set up a 529 or Coverdell account in your name while having an UTMA in your child’s name. Also, UTMA savings can be rolled over to a 529 account with some restrictions. Remember to prioritize your options before committing to a savings strategy.
Latest College & Financial Aid News
October 8, 2021
FAFSA is an acronym. It stands for "Free Application for Federal Student Aid". Please take note that the first word in the acronym is "Free". You do not need to pay to fill out the FAFSA but there are certainly websites out there that will charge you for their assistance. If you are asked for a credit card at any point in the process, you are at one of these sites. If you do not want to pay to complete the FAFSA, be sure to apply at https://studentaid.gov/h/apply-for-aid/fafsa. The FAFSA must be completed by you and your family each year if you wish to be considered for need-based grants from the college or university you are or will be attending as well as subsidized student loans. [...]
August 31, 2021
A study abroad program can be the beginning of the most exciting chapter of your college experience. Often, the travel, housing, credits and even food are included in the price of the program you choose. However, this is no reason not to look for more financial opportunities! [...]
August 19, 2021
As you get ready for this next big step in your life, this last year at home can feel like the longest and the shortest you ever had! While you prepare to select a college and research scholarships and financial aid, don’t forget to spend some quality time with your friends and family. While movies, even when based on a true story, are always a little bit fantastic, they are also works of art that share experiences among their viewers. [...]