Tax deduction for 529 contribution

I've been contribution to a UTMA for my daughter, a high school senior. It has about 25K in it now with a cost basis of 21K. It seems like it is worth while taking out most of the funds and putting them into a 529 for her, for the more favorable FAFSA assessment. I think I'm technically supposed to put it into a custodial 529 but I also read that is not absolutely necessary as long as the funds do go to her. Anyway, I think I can leave 6K in that account in her name with out her being assessed as that will be her only savings. She only has 3K in income so the added 4 K of income will also not affect her EFC, I think? She would have to file taxes on that income but at her income level I don't think she will owe any? </p>

<p>The question is, can I take the PA tax deduction, up to 13K per parent, on the funds transferred into the 529 since I invested them for her, or is she the only one who can take the deduction since it's a UTMA? </p>

<p>If I am missing anything in my plan to move this asset before the end of the year please advise. Is there any tax advantage to putting money in a Coverdell over the 529?</p>

<p>I've read many of the post but haven't got to this answer so I hope someone can help.</p>

<p>Thank you</p>



<p>I’m not sure where you read this, but I don’t believe it’s true. Your financial institution might not allow it. UTMA funds can be transferred into a 529, but the 529 must be titled the same as the originating UTMA. In your specific case you’d open a custodial 529 (aka UTMA/529) with your daughter as owner. She would then get the PA tax deduction, if applicable.</p>

<p>The only way you get the PA tax deduction is to open a parent-owned 529 with your daughter as beneficiary and contribute your own funds to that.</p>

<p>This article is for Maryland which gives a tax credit for 529 contributions, but the same principles apply:</p>

<p>[The</a> Frederick News-Post Online - Frederick County Maryland Daily Newspaper](<a href=“]The”></p>

<p>Legally you cannot withdraw money from an UTMA to fund a parent-owned 529, because your D is the actual owner of the money in the UTMA even though you are the one who put it all in there.</p>

<p>Odds are, though, that you could do this and the financial institution wouldn’t bat an eye. IMO it is fraudulent from a FA perspective because you are invalidly sheltering assets so they get assessed at a lower rate. It really isn’t any more work to create a custodial 529, so there is really no reason not to.</p>

<p>Transferring assets from an UTMA to a 529, either parent-owned or custodial, creates a taxable event, so make sure you consider that as well. You are creating $4K of unearned income for your D.</p>



<p>Just to clarify, the only taxable event is if there are realized capital gains in the liquidation of all UTMA assets, since the transfer has to be done in cash. If the UTMA is 100% cash already, there’s no tax owed on the transfer, it’s simply a tax-free rollover. In the OP’s case the capital gains would be taxed due to their lower cost basis.</p>


No, not sure where you are getting the info from but this is all wrong. For FAFSA, a dependent student has no *asset *protection at all. Any savings still in her name will be assessed to the EFC at 20% - so $6,000 will add 1200 to the EFC. If it is in a 529 account, including a UTMA 529, it is assessed at the parent rate and the maximum it would be 5.6%. It could be less depending on the parent income and assets - if your total reportable assets are below the parent protected assets, it would have no effect.</p>

<p>If the money is in a UTMA, legally it should be rolled into a UTMA 529 account. There is no FA legality issue with doing that. The rules were specifically changed a few years back to allow student owned 529 accounts to be treated as parent assets (actually there was a loophole for a year where student owned 529 accounts weren’t required to be reported at all - someone didn’t cross all their t’s and dot their i’s). I don’t have the expertise to comment on the and income tax issues.</p>

<p>Student protected *income *is currently about $6,000. Anything over $6,000 is assessed at 50%</p>

<p>Anecdotal evidence only, but it seems IRS paid more attention to 529 funds and their use last year. Friend was audited, I was challenged on reported profits. I don’t think there is any real advantage to not keeping student UTMA as a student 529 and keeping it legal, why attract attention? Good news for me, the IRS misread the form sent to them by broker, no penalty.</p>



<p>OP said “It has about 25K in it now with a cost basis of 21K” which I took to mean that there are $4K of unrealized capital gains in the account, but I guess I shouldn’t assume.</p>

<p>Thank you all for your comments.<br>
As I suspected there is no tax advantage as the money is staying in her name and you can’t take a deduction for contributing to a 529 for yourself, as I understand the IRS bulletin.
It does seem worthwhile to transfer the money to a custodial 529 to decrease our EFC. Our EFC will still be over 20K so I’m thinking she won’t get much aid, other than a loan anyways.
I’m not sure which is the best way to do this, either withdraw the funds or have them transferred. The account is currently with Fidelity and they handle a few states 529s but not PA, where we live and were my daughter will likely go to school. I presume it is best to invest in a PA 529, even though the UTMA is from NY. Does it matter which states 529 we invest in?
Thanks again.</p>

<p>It doesn’t matter which state’s 529 plan you invest in to get the PA tax deduction (even though your daughter won’t get any tax benefit from the conversion). You can do a search to find plans with the lowest costs. </p>

<p>It’s best to do a trustee-to-trustee transfer. Fidelity can set that up for you.</p>

<p>I don’t think you’re getting complete and accurate information here. I understand what you’re asking and trying to do so let me take a stab at an explanation. </p>

<p>Yes, as an UTMA it is an asset of your child and if moved to a custodial 529 it is STILL the child’s asset and will count as such on the FAFSA AND no deduction for the contribution - a lose-lose, IMO, but legally that’s the deal. </p>

<p>UTMA money can be used for the child’s expenses NOW and the money you currently use for that exoense can be new money into a 529 in your name - better FAFSA and tax deduction. However, you need legit expenses for the child to use the UTMA money on. Does she attend a private school? Use the UTMA for tuition NOW. How 'bout outside activities that are costly like dance/gymnastics/club sports, whatever. Does she need a new computer for college? UTMA money spend on her instead of your own money allows you to accomplish what you want, but whether or not you can spend $25K soon… tough to do. This is a great lesson to parents of younger kids with UTMA accounts for college. Find to use it on rather than your own money then use your money for 529 contributions.</p>

<p>Good luck.</p>


This is wrong.</p>

<p>While it would be owned by the child, for FAFSA purposes a custodial 529 is counted as the parent’s asset, which is assessed at a max of 5.64% rather than 20% if it is kept in the UTMA.</p>

<p>Thank you,</p>

<p>I think I got the UTMA /custodial 529 straight. It does seem odd that it does not matter which states 529 plan we use, but if that is the case I’ll see what Fidelity can do with it. </p>

<p>Thank you again for the clarification,
Despite the same FAFSA assessment it does seem like a good idea to spend some of the money on my daughters current senior year expenses, and then invest some of our own money in a regular 529, which has more flexibility to transfer, in case she does not end up needing the money for qualified expenses. </p>

<p>Is it true that the penalty and taxes for using the money for non qualifying expenses is only on the increase in value or capital gains, not the principal?</p>

<p>Yep, notrichenough is correct - I gave incorrect info in trying to answer the question. The custodian 529 would be considered in the parents’ assets for FAFSA purposes. Thanks for the correction.</p>

<p>We’re using custodial account for HS, other costs now and contributing the cash we’d have spent on those things to parent owned 529 plans. I think it’s a good way to go, but maybe doesn’t spend all or even most of a larger UTMA in time for college.</p>