The basic difference in these plans is related to their designated purpose. The 529 plan was introduced specifically to pay for a child’s educational expenses (including tuition, books, room and board), whether applied to K-12 schooling or college/postgraduate education. In contrast, UTMA and UGMA accounts are not simply educational savings plans; they can be used for any child’s expense, including education.
One large difference between the two plan types is freedom in how you invest. In a 529 plan, you are locked into that particular plan’s investment, like a preselected mutual fund. Different state 529 plans will utilize different preselected investment portfolios, and you may choose any state plan you wish. On the other hand, you have full freedom to purchase any stock, mutual fund, or other security if you choose a UTMA or UGMA plan.
In terms of tax benefits, contributions made into a 529 plan may offer state income tax deductions (depending on the state) but no federal credits. However, money accumulating in the account is not subject to tax, nor is it taxable upon withdrawal, when used for qualified educational expenses. UTMA and UGMA contributions are not tax deductible, and investment gains may also be subject to tax.
In terms of future taxation, the 529 and UTMA/UGMA plans are subject to gift tax rules. For example, you can distribute up to $15,000 per year per child from a 529 plan without triggering the gift tax. Anything beyond that threshold is taxable. A special provision allows a lump-sum contribution of up to $75,000 per beneficiary, which can be spread over five years, without requiring a gift tax payment. For UTMA and UGMA accounts, there is no distribution amount that is shielded from the gift tax.
Who Owns the Plan?
An important consideration is the custodial status of the UTMA and UGMA plans. As custodian, you own and manage the account until the child reaches age 18 or 21, depending on individual state rules. After that, the child owns the account and can make purchases for any purpose. Under a 529 account, you own the account indefinitely and can even decide to change the name of the beneficiary.
Here’s an interesting and important distinction. When it comes to determining a child’s request for financial aid from an educational institution, 529 plan assets or distributions are not considered owned by the child. However, assets in an UTMA or UGMA account are, and this can have implications on that child’s eligibility for financial aid.
Contact Isakov Planning Group today to answer your own questions and about setting up a 529 or UTMA/UGMA account for a child’s education or other expenses. To schedule time with us please click here.