Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA)
Custodial accounts are another tax-advantaged way to save for college. As custodian for the account, a parent, grandparent, or other adult makes all the investment decisions until the child reaches the age of maturity. UGMA accounts are limited to cash and securities and can hold other types of property.
You may transfer funds from a custodial account tax free to a 529 Plan if the plan accepts such transfers. Transfers must be cash transfers, so you must liquidate any investments you have made and pay taxes, if any, on any gains. There also may be other restrictions and limitations.
For more information visit www.irs.gov.
Advantages
- For children younger than 14 - The first $750 in earnings is tax-free. The next $750 in earnings is taxed at the child’s federal tax rate in 2001. Any earnings over $1500 are taxed at the custodian’s federal tax rate.
- For children over 14 - The first $750 in earnings is still tax-free, and all earnings after that are taxed at the child’s tax rate.
- No contribution or income limitations.
- Withdrawals can be used for any purpose without penalty.
Disadvantages
- When your child reaches the age of majority, 18 to 25 depending on the state you live in, the child takes over the account and can use the money in the account for anything.
- You may not switch beneficiaries because the account is considered the child’s asset.
Deductibility limits can be confusing and tax laws are frequently changing. It is always best to review your specific situation and/or circumstances with a qualified tax advisor.