Moving UGMA money into a 529 plan



Dear Joe, My grandson will be going to college in the fall 2010. When he was born, I set up an UGMA account for him because we did not have 529 plans 17 years ago. I've heard that I can convert the UGMA for him to a 529 plan. I'd like to do this through a 529 plan with a CD option since my current UGMA is a CD. Can I open the 529 with my grandson's UGMA money before he turns 18? I would put myself as the owner and list him as the beneficiary ... I'd like to do this so he or his parents will be able to get more financial aid money ... Am I thinking correctly on this? -- Ruth


Dear Ruth,

First, for my readers who don't know what an UGMA is, it refers to the Uniform Gifts to Minors Act. It allows money or other assets to be given as a gift to a minor child with a custodian staying in charge of it. A Uniform Transfers to Minors Act, or UTMA, account is a newer version that the states now use in place of the UGMA.

Yes, you can convert your grandson's UGMA to an UGMA-529. And yes, doing so may improve his federal financial aid award. An UGMA- or UTMA-529 is considered a parent asset on the federal financial aid application, or FAFSA, while an UGMA/UTMA invested in other types of assets is considered a student asset.

This is an important distinction. Parent assets are "assessed" in determining the Expected Family Contribution, or EFC, which is the family's part in financing a student's education before other need-based aid is approved. Parent assets top out at 5.64 percent of the market value of the total investment, while student assets are assessed at the much higher rate of 20 percent.

Here's an example. If the current CD in his UGMA account is worth $10,000, your grandchild's EFC is increased by $2,000. So, your family is paying more out of pocket or with unsubsidized loans. And you are receiving less in federal grants, work-study and subsidized loans.

By simply liquidating that CD and moving the money into a 529 plan at any time before filing the FAFSA, the EFC impact of the investment is reduced to $564, or even less depending on family income level. The result: Lower EFC means a greater possibility of receiving need-based financial aid.

With the money in a 529, the situation is improved even more by the fact that interest earned on a taxable CD also might increase the EFC while earnings in a tax-free 529 plan will not.

The same financial aid benefit is available for Coverdell education savings accounts, or ESAs. Some people will wonder why Congress decided to grant favorable treatment to 529s and ESAs. The reason is simple: They wanted to encourage more families to save for college with these plans.

You will probably want to wait until the current CD matures before making the move in order to avoid early redemption penalties. If the UGMA account held stocks or other types of assets, you would also need to consider the tax consequences of liquidating those investments and possibly triggering capital gains. The only contribution that a 529 plan can accept is a cash contribution.

It is important to note that your grandson's right to assume direct ownership at age 18 or 21, depending on your state's laws, is not affected when you move existing UGMA/UTMA money into a 529 plan.

Further, you are not entitled to change beneficiaries or use the funds for anyone other than your grandson while the custodianship is still in place. The 529 plan application will likely ask if the contribution represents UGMA/UTMA funds so that the plan administrator can take any actions it deems appropriate to preserve the child's legal rights.