The Help Desk

Your tough questions. MONEY's smart answers.
Presented by

Should I convert my daughter's UTMA to a 529 plan?

December 10, 2012: 6:30 AM ET

After reading about Uniform Transfer to Minors Act (UTMA) accounts, I regret opening one for my 13-year-old daughter. As I understand it, her mutual fund UTMA will reduce her financial aid by a greater amount than if the money was in my name or in a 529 plan. My daughter has about $3,000 in the account. How can I transfer it into a 529 plan without being penalized on taxes? – Harry

You understood correctly, for the most part: Under the federal methodology, a formula many schools use to determine financial aid, an UTMA account (or its near-equivalent, an UGMA) is considered a child's asset. As a result, money in the account reduces financial aid eligibility almost four times as much as it would if the money were in the parents' hands. In your case, the $3,000 your daughter has in her UTMA would reduce her aid by $600 in her first year of receiving financial aid, versus $168 if the money were under your name. So it may be prudent to shift the money into a 529 plan, which is considered a parental asset.

Not every college uses the federal methodology to calculate aid, however. Some private institutions use what's known as the "institutional methodology," which provides the option of weighting parents' and children's assets equally. In that case, putting your daughter's UTMA account money into a 529 plan wouldn't increase her aid.

Bill Cummings, founder of Tampa, Fla.-based advisory firm Cummings Financial Organization, says transferring the money to a 529 plan won't generate much of a tax hit unless more than $1,900 of the assets in the account came from investment gains. You can't transfer the mutual funds in the UTMA account directly to a 529 plan; instead, you'll have to sell the investments and fund the 529 with the proceeds. That sale may generate taxable capital gains. But the first $950 in gains is tax-free, and the next $950 is taxed at your daughter's (presumably low) capital gains rate. Any unearned income over $1,900 is taxed at the parent's marginal tax rate — but that's not likely to be an issue unless you've been extremely fortunate in the markets.

— Marc Mewshaw

Got a question for the Help Desk? Send it to helpdesk@cnnmoney.com.

Join the Conversation
Help Desk

Got a question about your money? We want to hear it! Each week we're answering your questions on CNN, Headline News and CNNMoney.com.

Your email or phone number won't be published; we'll use it to get in touch if we need more information about your question.
Help Desk Video
  • NEXT
    Not enough money in America's 401(k)s
    Despite the surging stock market bringing balances to record highs, the average Fidelity 401(k) account has less than $100,000 in it. That's just not enough. Play
  • NEXT
    BACK
    Explaining Obama's myRA
    President Obama unveiled a new savings plan for retirement accounts, aimed at encouraging people to start building their nest egg. But how exactly does it work? Play
  • NEXT
    BACK
    Tricks on how to save in your 20s
    Saving for your retirement in your 20s doesn't have to be a financial burden. Prioritizing your expenses is usually the first step in building a nest egg. Play
  • BACK
    Don't get fooled by Black Friday sales
    Here are some of the tricks that retailers use to make you think you're getting a deal. Keep an eye out for them while shopping this Black Friday. Play
Best Tips
Some of the nation's leading business owners, investors, and thinkers share their thoughts on rebuilding your wealth. More
These strategies can help you manage the challenges -- both emotional and financial -- of helping an aging parent from afar. More
You don't need to be fanatical to get to 780. Those in the know say these moves matter most. More
Featured Newsletters

Tips for saving and spending smarter.

Search This Column
View all entries from this: Week, Month
Help Desk
More help for your career, your investments and your budget.
Powered by WordPress.com VIP.