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So Says the 529 Guru

No. 1
Joe Hurley
Thursday, August 15th 2002


This is the first of an occasional Q&A column sent to registered members of

Question: "I think it's way too confusing to compare 529 plans when the states all have different rules. When are these things going to be federalized?" - CS, New York

Answer: Don't hold your breath waiting, CS. I agree that shopping for a 529 plan is made more difficult when every state does things their own way. But the states came up with these things in the first place and they have a vested interest in retaining control of them. How would you like it if, for example, you invented a popular software program and the federal government tried to subvert it? (Sorry, Bill.)

Besides, the federal government has its own college savings plan. It's called the Coverdell ESA. Not surprisingly, the feds really messed this one up when it first came out in 1997 law as the "Education IRA", but now it's much improved. In fact, the ESA is a worthy competitor to the 529 plan for first $2,000 of your child's college savings each year.

What concerns me more than the differences between the 529 plans is the degree of uncertainty. The 529 landscape is subject to regular change as new programs are launched, older ones are refurbished, and federal and state laws are revised. What you see now in a particular 529 plan may not be what you see a year from now.

For example, let's say you select a certain 529 savings program because you like the program manager, or perhaps the particular mutual funds available in the program. At the end of their multi-year contract, the state could replace the old program manager with a new one, and your account could be shifted from the investment option you were sold on to a different mutual fund or other investment. There will probably be nothing you can do about it, short of rolling over your investment to another state's 529 plan.

The complexity and uncertainty is the price you pay for the tax breaks and other benefits of a 529 plan. Many college savers will decide that it is a price worth paying. That includes me.

Question: "My son's grandparents have put a lot of money into a UTMA custodial account for him. He is now 15, and I really don't want him to think he can get his hands on the money when he turns 18. Since I'm the custodian I figure that I can transfer his UTMA account to a 529 plan and name him as account beneficiary. That way I control the money when he turns 18, not him. Any problems with this plan?" - Jan, Ohio

Answer: I get that question a lot. We like to think that our children will be responsible enough to handle money that comes their way when they reach age 18 or 21. But we also hear about those recent adults who decide to use the funds for something much more important than college, like dogging their favorite music groups around the country in an old school bus.

(And don't assume you can keep your 15-year old son from finding out about this potential pot of gold. I've come up with the idea for a new web site at I'm sure it would be a hit with teenagers.)

The problem with your plan, Jan, is that you may be violating the law (at least in a technical sense). The money was originally gifted by your parents to your son, not to you. Your legal duty as custodian is to administer the account for his benefit subject to the laws of the state in which the UTMA was established. If the law says that unspent funds become his direct property at age 18, there may be little you can do about it when that time comes, unless your attorney tells you otherwise.

Certainly, you can decide to invest UTMA money in a 529 plan, but that decision shouldn't impair your son's rights to the assets. When you inform the 529 program administrator that the funds are coming from an UTMA, special restrictions are slapped on the account. For instance, you will not be able to change the account beneficiary to someone else. And if your son contacts the program on his 18th birthday (or whatever age is established under the UTMA) and requests a withdrawal, even if it's for something other than college, he will probably be able to get it. Even those 529 plans that don't have special procedures to enforce these rules will remind you of your legal obligations as custodian.

Here's a better idea: Use the UTMA funds for expenses incurred for the benefit of your child. Private school and summer camp expenses are a no-brainer. Ask your attorney about other common everyday expenses that might be paid out of the UTMA. Then simply replace those funds by making contributions to a 529 plan where you retain complete ownership. Now your account beneficiary will never have access to the account without your permission.

For more information about "UTMA Regret" be sure to take a look at Kaye Thomas' excellent explanation at

Question: "What's all this "Guru" stuff, Joe? I thought you were raised to be more modest than that." - Mom

Answer: Yes, Mom, I admit I'm a little uncomfortable with that tag line. Would it help if I told you that the original title for this Q&A column was "So Says the 529 Guy Running," and that we simply decided to shorten it to the letters G-U-R-U? Obviously, there are an ever-increasing number of 529 experts out there as these investments continue to draw more attention (and more dollars). I'm just someone spending a lot of time studying this area hoping to help others. If I start catching too much flak, I'm sure we'll change the title to "So Says the 529 Geek" or something along those lines.

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