Funding Your Child’s Future: Comparing 529 Plans and UTMAs

As you start a new chapter in life by becoming a parent, you quickly realize that this role brings with it a lot of responsibility.  For some, that responsibility includes helping our children get a head start, whether that be by helping them with higher education or just giving them a little financial boost as they develop their independence.  When working with parents who want to financially support their young children, we often discuss 529 Plans and/or UTMAs (Uniform Transfers to Minors Act).  The strategies and purposes for those accounts can sometimes be confusing, so we put together the summary below to help understand the pros and cons of each and how they might be able to fit into your own plan.

UTMA (Uniform Transfers to Minors Act): UTMA accounts are a great way to save money for future funding of your child's college education or other expenses. This type of account is referred to as a custodial account where you, as the parent, are the custodian or owner of the account until the minor child reaches a certain age. Typically, it is either when they turn 18 or 21 years old. This type of account has great flexibility, whether it be for college expenses or something else, like a sleepaway summer camp. The funds simply must be used for the benefit of the child. 

Pros

1. Flexibility with the use of funds. 
2. There are no restrictions on the types of investments you can use in these accounts.

Con

1. The account cannot be transferred to another child.

529 Account: 529 Plans are another great way to set money aside for the future benefit of your child. While the use of the funds is a bit more restrictive than a UTMA as it is limited to education expenses, it still provides great value, especially with the new rule changes allowing for any excess funds to be rolled into a Roth IRA for your child. While it used to be somewhat worrisome if you over-contributed to this type of account, now it has this additional benefit thereby changing many people's outlook on the effectiveness of this account. 

Pros

1. Potential Tax Advantages: Check with your financial advisor and accountant to make sure this applies to you.
2. 529 to Roth Conversion: In a recent rule change, you can now rollover excess funds from a 529 account to a Roth IRA in the name of your child.
3. Transfer of Accounts: Since the account owner is you, you can transfer funds to a different child or the next generation if there are still unused funds within the account. 

Cons

1. Limited Usage of Funds: Mainly for educational purposes creating more restrictions than a UTMA.
2. Limited Investment Options: Within a 529 plan you have selected investment options from which to choose. (Like your 401k, there are limited options available to you in the plan compared to having an IRA, you manage yourself). 

Some people may ask, what is the best account for me and my situation? Well, it comes down to your personal preference, both accounts have their advantages and disadvantages, but both are great options to save for the future expenses of your child. Please let us know if this is a topic you would like to discuss in more detail, we would be happy to arrange a time to learn more about your specific situation.

Green Ridge Wealth Planning, LLC is a registered investment adviser. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment / tax advice. The investment / tax strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment / tax strategy for his or her own particular situation before making any investment decision. You are responsible for consulting your investment and/or tax advisor as to the consequences associated with any investment.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of the AUTHOR, may differ from the views or opinions expressed by other areas of Green Ridge Wealth Planning, LLC, and are only for general informational purposes as of the date indicated.