Friday, February 21, 2014

College Savings – 529 Plans and UTMAs

In previous posts we’ve discussed considerations for college planning. In this post we are going to discuss saving for college and, specifically, two of the more common accounts for college savings: Uniform Transfer to Minor Account (UTMA) and Section 529 Plans.

The Uniform Transfer to Minor Account (UTMA) was an early popular choice for many families to save for college education as it offered a few advantages over traditional savings accounts. First, the transfer of assets was treated as a completed gift which removed the assets from the donor’s gross estate. As a gift, it was subject to the current annual gift exclusion ($14,000 in 2014). Second, any unearned income received favorable tax treatment, albeit lessened with the advent of the “kiddie tax.” Unearned income is generally investment income including interest, dividends and capital gains. Under the current tax code, the first $1,000 of unearned income is exempt using the standard deduction for dependents; and the next $1,000 of unearned income is taxed at the child’s income tax rate. However, any unearned income in excess of $2,000 is taxed at the parent’s marginal tax rate. One drawback to the UTMA is it is considered an irrevocable gift. When the recipient reached the age of maturity – 21 in Pennsylvania and most other states – the custodianship ends, meaning the recipient now has full control and can dispense with the assets however they choose.