Saving for College: UTMAs and 529 Plans

/24-7/ -- With the costs of attending college increasing every year, many parents wonder what is the best way for them to save for a child's education. While there are several different options for saving for college, two of the most popular choices are UTMA accounts and 529 plans.

UTMA Basics

UTMA (Uniform Transfers to Minors Act) accounts are custodial accounts that can be set up at any financial institution. One parent generally serves as the custodian over the account. UTMA accounts allow parents to put securities, bonds and other investments in a child's name. Once their child reaches the age of majority, the assets in the account become the child's property. In Illinois, the age of majority under the Act is 18 for most types of investments and 21 for gifts.

The investments placed in the UTMA account can be used to pay for college or for anything else, so long as it benefits the child. Any assets placed into the account are forever the child's - the parents may not transfer them back. This is known as an "irrevocable gift." Once the child reaches the age of majority, however, the custodian loses control over the account and the child can use the assets for whatever he or she wants, which may or may not include education expenses.

529 Plans

Parents looking for a way to save for college also have the option of opening up one of the many state-sponsored 529 plans. These plans are offered by each individual state, so there is variation in the types of 529s available and the benefits offered. However, there are some common denominators for all of the plans, including federal tax benefits. The money placed in 529 plans grows tax-free and may be deducted without federal tax consequences so long as it is used for educational expenses.

Unlike UTMA accounts, a child does not gain control over the funds in a 529 account once he or she reaches 18. Instead, the parents always retain control over the assets in the account. Additionally, the parents can use the funds in 529s for other purposes besides the child's education, although they will have to pay taxes on the money and a penalty for doing so. The account also is transferable and can be transferred to another child if the intended child beneficiary decides not to go to school.

Pros and Cons of the UTMAs and 529s

There are benefits and drawbacks to UTMAs and 529 plans. Some of the factors parents should consider before opening either type of account include:

Tax benefits

UTMAs used to provide a significant tax shelter, but the rules have since been changed. Now, any assets in the account valued at more than $1900 are taxed at the same rate as the parent's income.

The money placed into a 529 plan is tax-free and can be taken out of the account tax-free, so long as it is used for qualified educational expenses. The money can be taken out for non-educational expenses, but it is then subject to federal taxes as well as a 10% penalty. States also may offer state income tax benefits to their residents who invest in their 529 plans.

Financial aid eligibility

Assets in a UTMA account are attributed to the child for purposes of determining financial aid. Depending on the value of the account, this can have a profound effect on the child's ability to get need-based financial aid.

Assets in 529 plans, on the other hand, are considered the parents' assets. While they still will be considered when determining financial aid eligibility, it will have less of a potential impact on the child's ability to obtain federal financial aid.

Limits on contributions

There is no limit on the amount of contributions that may be made each year to a UTMA account. However, parents who give more than $13,000 individually or $26,000 jointly may be required to pay gift taxes on the transfer.

Most 529 plans will have either an annual cap or a plan cap on the amount of money that may be placed in the account. As with UTMA accounts, parents who contribute more than the federal limits for gifts may be subject to gift taxes.

Degree of involvement in investing

In UTMA accounts, the custodian has complete control over the types of investments that are made. 529 plans do not offer this type of control. Instead, an administrator is selected by the institution sponsoring the plan, who then determines how to invest the money. 529s also limit the amount of times that parents can change the plan's portfolio, which is generally only once per year.

With the current uncertainty in the market and the losses many suffered to their retirement accounts and 529 plans, parents may be uncomfortable relinquishing control over the account's investments. For those who want complete control over how the funds are invested, UTMA accounts are a better choice.

Control

The custodian only has control over UTMA accounts until the child reaches the age of majority. At that time, title to the assets goes to the child, who then is free to do as he or she pleases with the assets.

In 529s, the parent retains control over the account and how the assets are used at all times.

Flexibility

While the custodian still has control over a UTMA account, the assets can be used for anything so long as it is for the child's benefit. This may include paying tuition, but also could include purchasing a car. Once the child reaches the age of majority, the assets can be used by the child for any purpose, educational or otherwise.

The assets in a 529 plan should be used for education expenses to maximize the tax benefits of the account. However, the account can be used for other expenses, but will be subject to income tax and a penalty.

Legal Issues With UTMA Plans

It is important for parents considering setting up a UTMA plan to remember that any contributions they make to this plan are irrevocable gifts that belong to their child. This means that while the parent has custodial authority over the account, the investments and funds in the account must be made for the child's - not the parent's - benefit.

Thus, a parent falling on hard times cannot sell, transfer or otherwise use the assets in the UTMA account for his or her own purposes. Likewise, the parent cannot transfer the assets back to him or herself. Moreover, a custodian who does not act in the best financial interests of the child beneficiary may have legal liability for his or her acts.

Conclusion

Deciding how best to save for your child's future is an important decision. For more information on UTMA and 529 accounts, contact an experienced attorney today.

Article provided by Van Schwab, Attorney at Law

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'The State of College Savings' Survey Finds Parent Confidence Crashing As They Rely on Loans, Shift Debt Burden to Their Children

'The State of College Savings' Survey Finds Parent Confidence Crashing As They Rely on Loans, Shift Debt Burden to Their Children - 529 Investors Still Most Successful Savers

/PRNewswire/ -- Parents' confidence in their ability to save for college plummeted over the last year, as they socked away less and relied more on the prospect of student loans and grants to fund their children's college education, according to the 2009 "The State of College Savings" survey of nearly 800 parents across regions and income levels conducted by the College Savings Foundation (CSF).

Forty-four percent of parents are "not very confident" that they will reach their college savings goals, up from 31 percent in 2008; while the number of parents who are "very confident" has plunged to 12 percent from 20 percent last year.

Reduced savings may be contributing to this malaise: one-third of parents said that they are saving less for college this year than last, with 43 percent of those prioritizing current living expenses and 29 percent suffering a cut in income. Of the total parents surveyed, 41 percent have saved nothing at all, and 28 percent have saved less than $5,000 per child.

The number of parents expecting student loans to pay for college soared to 47 percent from 37 percent one year ago. Those expecting financial aid spiked up to 73 percent from 62 percent last year. And, more parents are shifting the debt burden to their children: 68 percent versus 63 percent last year, with 46 percent expecting their kids to be responsible for up to one-third of their college debt - up from 34 percent in 2008.

Despite this behavior, parents haven't adjusted or changed their hopes and aspirations: 76 percent of parents don't expect to have to narrow their children's college choices; and 76 percent would be very disappointed if their child could not afford to go to college (at least 8 on a scale of 1-10).

Pointing to a clear strategy for bridging this gap between intention and action was the finding that parents owning 529 college savings plans were the most successful group in saving for college: 61 percent of parents with 529s have saved more than $5,000 per child, versus 22 percent of those without one.

"This survey is a call to action for parents to save early and often - even if they can only start with small amounts," said Kevin McMullen, Chairman of the College Savings Foundation, a leading nonprofit encouraging American families to save for their children's college education. "The economic reality is that parents cannot count on college loans and grants being available or affordable when their children reach college age. Any shortfall in college funding will cascade as debt burden onto their children's futures."

Parents realize that their dependence on debt will have a long term impact: 65 percent expect that it will take at least five years for them or their children to pay it off after graduation.

Those who can't get loans anticipate getting Federal or State grants: 28 percent of parents are relying on these as their primary source of college funds, compared to 20 percent last year. Seventeen percent expect financial aid to cover over two-thirds of all college costs - up from only ten percent last year. Thirty-four percent expect it to cover up to one third of college costs.

"Financial aid covers only a portion of college costs and families need to look for ways to close that gap," McMullen said. According to the College Board, in 2007-2008 undergraduate students received on average $8,896 in financial aid, including $4,656 in grant aid and $3,650 in federal loans. This represents a fraction of the average $14,333 cost of today's four-year public college, or $34,132 for a private college or university.

As in last year's survey, 22 percent of parents expect help from grandparents; and 72 percent expect no help in paying for college at all. Twenty-seven percent would ask friends and family to "trade toys for tuition," or contribute to college rather than in material gifts.

Three-quarters (74 percent) of parents do not even know how much they need to save, up from 70 percent last year.

"In the face of an economic climate that is clearly putting families under pressure, we as an industry including financial advisors and policy makers should redouble our efforts to raise awareness on how to save to stave off debt," McMullen said.

The survey showed that many parents are saving successfully through vehicles like 529 college savings plans and strategies like automatic savings programs, enabling systematic and regular contributions of funds for college savings.

Parents owning 529s were far more successful in saving than those using other investments: 34% of parents who have saved more than $5,000 per child invest in 529s as their primary savings vehicle, more than double that of the next most popular ones: 14 percent of parents who have saved more than $5,000 per child are primarily in mutual funds, and 14 percent are in cash.

The percentage of parents in 529 plans held steady from the 2008 report. Nearly one in four, or 23 percent, is invested in a 529 college savings plan, and one in five (19 percent) says that 529s are the number one college savings vehicle, exceeded only by cash at 25 percent. At the same time, in a question that permitted more than one answer, the 2009 survey found that those parents who are saving are also squirreling money away in general (57 percent) and emergency (31 percent) funds.

"While it is understandable that parents are keeping cash at hand in these uncertain economic times, families are continuing to recognize the benefits of 529 college savings plans in reducing taxes and reaching their college savings goals," said McMullen. "Parents have the option to keep 529 funds in cash as well."

The 2009 State of College Savings survey also offered these glimmers of good news:

-- Although 46 percent of parents said that they would like to save more
in general but can't because of this year's economic reality, one in
four parents - 24 percent - said that they were actually saving more
than before.
-- Parents seemed to understand that a little is better than nothing:
those who tried to save at least something edged up from last year:
28 percent have saved less than $5,000 per child - but that is up from
22 percent in 2008. Around 30 percent of those are invested in a 529.
-- Parenthood prompts saving and gives parents time to build savings
momentum: 25 percent of parents started saving when their child was
born, and 20 percent when the child was 1-5 years old. Those parents
with children 11-13 years old, and those with children 14-18 years
old, had saved more than those in other age groups. Approximately 42
percent of each of those groups has saved more than $5,000 per child,
versus 26 percent of those with children in younger and older
categories.
-- While 20% of parents used an automatic savings strategy, those that
did were successful savers. 63% of them have saved more than $5,000
per child. 35% have been able to save between $100-$300 per month.
57% of those utilizing an automatic savings strategy own a 529.

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