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Should you open an UGMA/UTMA 529?
Do we improve our child's financial-aid prospects by moving his existing UGMA/UTMA investments into an UGMA/UTMA 529?
Quite possibly yes. Let's assume your child's UGMA/UTMA account has $50,000 worth of mutual funds on the day he or she files the FAFSA. Your Expected Family Contribution (EFC) will include 20% of that value, or $10,000. If the mutual funds were liquidated and the cash contributed to an UGMA/UTMA 529 prior to submitting the FAFSA, your EFC will include at most 5.64% of that value, or $2,820. Your child's "financial need" increases by at least $7,180 for the current school year.
But there are some important caveats. You have to consider the consequences of liquidating the mutual funds and triggering capital gains. Any gains will not only be reportable on your child's income tax returns, but they will also be included in base-year income on the following year's FAFSA, which can cause a decrease in aid eligibility.
Also remember that we are talking here only about federal financial aid. For school-based aid (grants, scholarships, or tuition discounts from the school's own funds), you are not likely to find the same advantage by moving UGMA/UTMA money into a 529 plan.
How about making contributions of my own money to my child's UGMA/UTMA 529? Will that help?
No. Beginning with the 2009-10 school year, a 529 account is treated as your parental asset whether owned by you, by your child through an UGMA/UTMA, or by your child directly. Most parents would prefer to retain control by contributing to their own 529 accounts.
But what about the 529 plans I have for my younger children? Will I have to report them on my older child's FAFSA?
Great question. The federal government is telling us that you must include as parental assets the 529 accounts you own for anyone else, because you have full ownership and control of those accounts. It's unfortunate when the funds set aside for a younger child's college education negatively impact the financial-aid eligibility of the older child trying to pay for college.
In this case, you may want to seriously consider setting up the 529 accounts for your younger children as UGMA/UTMA 529s, recognizing the additional restrictions and ultimate loss of control. If you have already established the accounts as parent-owned 529s, you may find that your 529 plan administrator will not accept your request for a change in ownership. Avoid taking any action that will be treated as a liquidation of your existing 529 account, leading to tax and penalty on the growth.
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