I have an UTMA account that I started for my son to pay for college before the days of the 529 plan. He will be 16 next month, and I'm concerned about how colleges will consider this money when we apply for financial aid. Can and should I liquidate the funds in the UTMA account and transfer them to a 529 plan? What can I do with the UTMA account so that it doesn't hurt us when financial aid time comes around in two years?—Name withheld, Laurel, Md.

You have a valid concern about the effect that your son's Uniform Transfers to Minors Act (UTMA) account might have on his financial aid: In calculating aid, assets held in his name can be weighted more heavily than if they were held in a 529 account or another account in a parent's name. To get an idea of how much effect it might have (and whether you would qualify for financial aid in the first place), use the Finaid.org FAFSA estimator and see how moving around the money might affect your family's expected contribution.

If there is no change in your expected family contribution, then you're probably better off leaving it in the UTMA, where at least some of the income and capital gains might be taxed at your child's presumably lower rate.

Moving it to a 529 plan is probably a good strategy so long as you're sure the money will go toward your child's college costs. If not, withdrawal of earnings will be taxed as ordinary income and be subject to a 10% penalty. Additionally, to address the issue of taking something that's owned by your child (the UTMA) and moving it into something you own (a 529), transfer the funds into what's known as a custodial 529. With a custodial 529 plan, the account owner is the custodian until the beneficiary reaches the age of majority (either 18 or 21). At that point, the beneficiary takes ownership of the 529 plan directly. As with a 529 plan owned by a parent, your child still gets the advantages of tax-free growth and favorable financial aid treatment.

Another catch: Contributions to 529 plans have to be in cash, says Evanston, Ill. financial planner Danielle Schultz. So you should check whether you have to liquidate investments in the UTMA before you transfer any money, and pay attention to any tax hit that might result.

There's another option: If your child incurs expenses such as private school tuition, you can pay those with funds from the UTMA, drawing down the account, and then use your own assets to pay for college.

-- Jeff Wuorio

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