As a parent, grandparent, or soon-to-be parent, planning for your child’s future is a top priority. One of the most significant aspects of this planning involves preparing for their education. This guide will help you understand two popular savings options: 529 accounts and UTMA/UGMA accounts. We’ll explore what they are, how they work, and how they can be used to help secure your child’s future.

Understanding 529 Accounts

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. It’s named after Section 529 of the Internal Revenue Code. There are two main types of 529 plans: education savings plans and prepaid tuition plans.

What Can 529 Funds Be Used For?

The funds accumulated in a 529 plan can be used for a wide range of education-related expenses. These include:

• College expenses: This includes tuition, fees, books, supplies, and equipment required for the enrollment or attendance at an eligible postsecondary institution.
• K-12 education: Up to $10,000 per year can be used for tuition expenses at a public, private, or religious elementary or secondary school.
• Apprenticeship programs: The SECURE Act of 2019 expanded tax-free 529 plan withdrawals to include registered apprenticeship program expenses.
• Student loan repayments: Up to $10,000 in total (not annually) can be used to pay down the beneficiary’s student loan debt.

What's New for 529s?

The SECURE 2.0 Act of 2022 introduced a significant change to 529 plans. It now permits up to $35,000 of unspent funds in a 529 account to be rolled over into a Roth IRA account, provided the account is at least 15 years old. This provides an additional avenue for utilizing unused 529 funds.

Understanding UTMA/UGMA Accounts

UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts are custodial accounts that allow adults to transfer assets to a minor without establishing a trust. These accounts are controlled by an adult custodian until the minor reaches the age of majority, which varies by state.

How Are UTMA/UGMA Accounts Different from 529 Plans?

While both 529 and UTMA/UGMA accounts are designed to benefit a minor, there are key differences:

• Control of funds: In a 529 plan, the account owner retains control of the funds. In contrast, in a UTMA/UGMA account, the assets are considered the property of the minor.
• Use of funds: 529 plan funds must be used for qualified education expenses to avoid penalties. UTMA/UGMA funds can be used for any purpose that benefits the minor.
• Tax treatment: 529 plans offer tax-free earnings growth and withdrawals for qualified expenses. UTMA/UGMA accounts are subject to the “kiddie tax” rules, potentially taxing some portion of the earnings at the parents’ tax rate.

What If the Beneficiary Doesn't Go to College?

If the beneficiary doesn't go to college, you still have options:

• Change the beneficiary: You can change the beneficiary to another qualifying family member.
• Non-college education expenses: 529 funds can be used for K-12 tuition, apprenticeship programs, and even trade schools.
• Non-qualified expenses: You can withdraw the money for non-qualified expenses, but the earnings portion of the withdrawal may be subject to income tax and a 10% penalty.
• Rollover to a Roth IRA: As mentioned earlier, the SECURE 2.0 Act allows for a rollover of up to $35,000 of 529 funds into a Roth IRA, subject to certain conditions.

Converting Unused 529 Funds to a Roth IRA

The SECURE 2.0 Act allows for a rollover of up to $35,000 of 529 funds into a Roth IRA. This can only be done if the 529 account has been open for at least 15 years. The rollover is also subject to Roth IRA annual contribution limits. This option provides a new avenue for utilizing unused 529 funds and can contribute to the beneficiary’s retirement savings. However, it’s best to discuss this with your advisor to understand the specific circumstances under which this can work.

Conclusion

Planning for your child’s future is a journey filled with important decisions. Whether you’re considering a 529 plan, a UTMA/UGMA account, or both, understanding these options is the first step towards making informed decisions. Remember, every family’s situation is unique, and what works best for one may not work for another. It’s always a good idea to consult with a financial advisor to ensure you’re making the best choices for your family’s needs. We hope this guide has been helpful and encourage you to continue exploring and asking questions about your child’s financial future.

Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investments in such state’s 529 savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.

IMerriweather Money Management, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.