Is 529 or UTMA better?
Both types of accounts have pros and cons, but for most families, 529 plans are the better choice for college savings. That’s because they offer more tax benefits and often affect your child’s ability to get financial aid to a lesser degree. Here’s what to know when choosing between UGMA, UTMA and 529 plans.
Can a child have both UTMA and 529?
You can move money from a custodial account, such as a UGMA (Uniform Gifts to Minors Act) or a UTMA (Uniform Transfers to Minors Act), to a 529 plan. But you can’t do the reverse — transfer or convert from a 529 to a custodial account — without adverse tax consequences.
What are the disadvantages of a UTMA account?
Cons of an UGMA/UTMA Account A big drawback is that all assets transferred into an UGMA account law are irrevocable transfers. This means that your child owns the assets, and the child has the authority (not the parent) on how to use the funds once the child reaches the age of majority.
Does UTMA grow tax free?
Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child’s—usually lower—tax rate, rather than the parent’s rate. For some families, this savings can be significant. Up to $1,050 in earnings tax-free.
Does UTMA affect fafsa?
The Takeaway on Custodial Accounts In fact, custodial bank and brokerage accounts can curb FAFSA-based financial aid by as much as 20%. (You can roll UTMA or UGMA account assets into a custodial 529 plan and reduce the financial aid impact from 20% to 5.64%.
What is the advantage of a UTMA?
The main advantage of using a UTMA account is that the money contributed into the account is exempted from paying a gift tax of up to a maximum of $15,000 per year for 2021 ($16,000 for 2022). 2 Any income earned on the contributed funds is taxed at the tax rate of the minor who is being gifted the funds.
Is UTMA a trust?
The most common trust for a minor is known as a custodial account (an UGMA or UTMA account). The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee.
Can you use UTMA funds to buy a car?
In other words, a parent can’t use UTMA funds for groceries, clothes or child-support payments, but can feel free to spend the money on treats like after-school classes, a trip to Europe or even a car, says Kaye Thomas, a tax lawyer and founder of Fairmark.com, a Web site dedicated to tax issues.
Is UTMA considered a gift?
Key Takeaways The Uniform Transfers to Minors Act allows a minor to receive gifts without the aid of a guardian or trustee. The law is an extension of the Uniform Gift to Minors Act. The minor named in the UTMA can avoid tax consequences until they attain legal age for the state in which the account is set up.
Can a parent withdraw money from a UTMA account?
A parent can withdraw money from a UTMA account provided that they’re the custodian of the account, but the custodian can only spend the withdrawn funds on the minor’s behalf and for their benefit.