Moving Custodial Savings Acct to 529

<p>My daughter has substantial savings in a custodial savings account. From what I gather, for FAFSA purposes it would be best to have this money in a 529 college savings account. Would it be okay to make this move now in 2011, prior to filing my FAFSA in January 2012?</p>

<p>You should be fine moving it now since a rollover from a custodial UGMA to a custodial 529 is not a taxable event, all that should matter is where the assets are the day you fill out the FAFSA...</p>

<p>FinAid.org has good guidance on the rules for this...</p>

<p>FinAid</a> | Saving for College | Section 529 Plans</p>

<p>"Parents who have saved money in their child's names using a traditional UGMA or UTMA account should consider liquidating the account and rolling the money over into the custodial version of a 529 college savings plan. UGMA and UTMA accounts are treated as child assets, with a negative impact on financial aid eligibility. Money in a custodial 529 plan is treated as a parent asset, which is more favorable than a child asset. This will significantly improve the eligibility for need-based financial aid."</p>

<p>The transfer itself isn't a taxable event, but liquidating stock in the UGMA might involve realizing capital gains which might be taxable. That will increase the student's AGI, which is reported on FAFSA (after a $5K allowance).</p>

<p>It's a good idea to do the what-if calculations ahead of time using the latest FAFSA spreadsheet (I don't have the link handy but it's been linked here many times).</p>

<p>
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That will increase the student's AGI, which is reported on FAFSA (after a $5K allowance).

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Just for clarification (as the OP is new to FAFSA). You must report the student's total AGI (or income if student is not required to do a tax return)on FAFSA. There is an income allowance built into the EFC formula, but the formula applies the allowance to the AGI which must be reported in full.</p>

<p>As mentioned above, do check for any impacts to income from converting the UGMA. Student income over the protected income allowance will have a 50% impact on the EFC. Student held assets will have a 20% impact. A 529 account is treated as a parent asset so will have a maximum 5.6% impact. Take it all into account when making your decision.</p>

<p>I have a very similar situation here: my ex-husband(my daughter's dad) passed away and left quite a lot of money(more than $5K) for my daughter. Right now it is in the UTMA account for her and I am the custodian for that account. As you discussed above, it is better transfer UTMA to a custodian 529 account, it is a great advise! But I am not sure in my case since I am not the parent who gave her that money, can I still do that since this new 529 account will treated as my asset and actually those money are not from me?Thanks!</p>

<p>It would have to be transferred to a UGMA 529 account. It would still belong to your daughter. FAFSA just treats it as a parent asset when calculating the EFC. It does not matter who gave her the money in the first place.</p>

<p>There are different ways of setting up 529s. The most common is a parent-owned 529 with the child as beneficiary. That's different from what's being discussed here. Money in a UTMA is owned by the child, with the parent as custodian. If that UTMA money is to be transferred to a 529, the title must remain the same. So the new 529 must be a child-owned 529, which is also known as a custodial 529. It's a 529 owned by the child, with the parent as custodian. Your financial institution can probably handle the transfer so that it's done correctly - it's not a difficult process.</p>

<p>All 529s are treated as if they were parent assets by FAFSA, even child-owned 529s, and are assessed at the parent rate of 5.6%.</p>

<p>Just to add to this: our fund's advisor warned us of capital gains, but noted that those would be liable to our child. On checking the IRS website, minors are exempted from capital gains taxes until 2012 (at least under a certain amount - don't remember the exact details...).</p>

<p>Are you sure about that? I thought capital gains (other than quite low amounts) were taxed at the parents rates under the kiddie tax rules.</p>

<p>How is it legal to transfer money from a UGMA or UTMA account in the name of a child to a 529 account in the name of the parent? Thats theft. The UGMA money in the name of the child MUST be spent for the benefit of the child. The 529 could be spent for the benefit of others.</p>

<p>These posts are talking about transferring the money into a UGMA 529 account. The money would still be in the child's name, but FAFSA treats UGMA 529 accounts as parent assets.</p>

<p>^ This is my understanding. A UTMA must remain in child's name. If there is something that can be done legally, I would love to hear.</p>

<p>Cross post^.</p>

<p>Thanks for info.</p>

<p>The title on the account remains the same: a UTMA is owned by the child with the parent as custodian, since minors cannot hold financial instruments in their names. When the UTMA is transferred to a child-owned 529 (also known as a custodial 529 or a UTMA/529) then it's still owned by the child with the parent as custodian. When the child reaches 18 or 21 (depending on the state) the account will no longer require a custodian and becomes property of the beneficiary. The difference between a child-owned 529 and a parent-owned 529 is that for a child-owned 529 the beneficiary cannot be changed, while for a parent-owned 529 the beneficiary can be changed.</p>

<p>As far as the kiddie tax, children must file taxes if their earned income is greater than $5,700 or their unearned income (like dividends and interest) is greater than $950. If interest plus dividends plus other investment income total more than $1,900, part of the child's income will be taxed at the parent's tax rate instead of the child's tax rate.</p>

<p>"You should be fine moving it now since a rollover from a custodial UGMA to a custodial 529 is not a taxable event, all that should matter is where the assets are the day you fill out the FAFSA..." - dukedad</p>

<p>Does anyone know if this statement is correct? For instance, if I were to move UTMA funds to custodial 529 in early January and then fill out FAFSA is that acceptable for fall 2012 college entry?</p>

<p>Yes, it's fine to move UTMA funds to a custodial 529 at any point. You will report assets as of the day you file FAFSA, so if you have funds in a custodial 529 on the day you file FAFSA, those are the funds you'll be reporting.</p>

<p>Thank you!</p>