Convert UTMA to 529

For the fact that a 529 custodian (I mean the parent or guardian, not the broker) can change beneficiaries on the account, this would seem to open a can or worms, no? The money in my daughter's UTMA or other beneficiary accounts is definitely hers, but he 529, not so much.

I retract the above. From the Fidelity site; I have a Uniform Gifts to Minors Act or Uniform Transfers to Minors (UGMA/UTMA) account. Can I transfer those assets into a 529 plan account? Yes, however, you must first liquidate the assets in the UGMA/UTMA account and pay any applicable taxes. Investments may be subject to fees and expenses. After liquidation, you can invest the cash in an UGMA/UTMA (Custodial) 529 plan account. An UGMA/UTMA 529 plan account will be subject to the rules for both types of accounts, including applicable UGMA/UTMA state statutes. You cannot change the beneficiary of an UGMA/UTMA 529 plan account. You may want to consult a tax professional regarding your specific tax situation.

So there's a provision that would forbid the change in beneficiary.

Sorry for the slow response... been away form these issues for a while.

So, it looks like that if the daughter is the beneficiary in both cases, you can make the switch.

Anyone disagree?

Anyone know of a good site that details what you can and can't do with the 529 (once formed) that's written in layman's language to get me started on that process?

I'd look at the specifics for the 529 account you'd plan to use. Each offers its own choices of investments. When compared to other investment accounts, the 529 has very limited options, e.g. no choosing individual stocks, limited selection of funds or ETFs.

The tax free growth may be worth it, but it's a tradeoff you need to analyze.

Well, I disagree.

I'm not an expert on 529 plans, but the code says that the account must be "on behalf of a designated beneficiary...."

Does anyone else think that someone can set up a 529 plan for himself? Because it looks to me as if that is not within the scope of the statute.

The problem is that once money is put into a UGMA trust, it legally belongs to the beneficiary. Shifting it to a 529 plan would in effect be the beneficiary putting it into the plan for himself. That doesn't appear to be permitted by the statute.

___ Stu

Stu:

The UTMA is for the (my child) student. The 529 would be for the same (my child) student. Is there something subtle I am missing in the definition here of "beneficiary"... or was my previous post just unclear about the accounts?

Thanks,

That's not what's happening here. There's a UTMA the father wishes to put into a UTMA/529 account. I'm not 100% familiar with FAFSA rules, but it seems the funds are looked at differently.

My original concern with 529 was the ability to change beneficiaries, but the Fidelity Q&A cites the existence of a UTMA 529 that precludes beneficiary changes. So your concern was mine as well, but in this case, the money is still only for the daughter's benefit.

What I am saying is that once you set up a UGMA trust, whatever is in the trust is legally owned by the child. If you then move the money in that trust to a 529 plan, it would legally being the child moving her own money into the 529 plan.

By my reading of the statute it appears not to allow someone to transfer money into a 529 plan for himself - which is what would appear to be happenning in your case. Instead money goes into a 529 plan directly from one person (i.e. you) to another person (i.e. your child).

___ Stu

Then I don't understand what is happenning here.

It seems to me that a UTMA trust and a 529 plan would be mutually exclusive and could not co-exist in the same account at the same time.

But again, I'm not a 529 expert. I'm just basing this on my reading of the statute.

___ Stu

Let's all back up for a moment. There is no guidance nor any rulings on whether a UTMA/UGMA account can be transferred into a 529 plan. There is no guidance on what the impications are of a transfer. One must look to the federal and state statutes to make a determination. Some things are clear. The child is the owner of the assets in the UGMA account. Someone else (typically a parent) is the guardian. State law determines at what age the beneficiary has access to the money. Therefore, if the UGMA is liquidated and the funds are transferred to a 529, the 529 plan should be titled as a custodial account as the funds still belong to the child. The beneficary can not be changed as that would violate the statutes relating to ownership. Stu's point is valid because no one knows whether this transfer violates the statute relating to 529 plans. This is one of the reasons why some states will not accept transfers into 529 plans. In addition, there could be FAFSA issues. Normally, a 529 plan counts against the parent. A 529 plan that is a custodial account, would or should count against the student as the student is the owner. Lastly, when the student reaches the age of maturity as stated in state law for UGMAs, the guardianship should end. This is another reason why some states will not accept a transfer.

I was going that way until I discovered the Q&A on Fidelity site. Not citing regulations, but trusting that Fidelity would know what's permitted or not. They mentioned the ability to have a UTMA 529 account, which I agree seemed mutually exclusive.

Sorry... I let this hang a while. I'm checking on more of the 529 issues. I may have later questions for you guys.

A general question on the UTMA: As money is withdrawn for use by the beneficiary (no 529 conversion), are the taxes calculated in the same way as any investment e.g. you sell some shares in the fund it's sitting in, withdraw the proceeds, and you pay taxes on only the capital gain involved? Or are there some funky rules for the UTMA?

Yes, the same as any other investment, as you described. No "funky" rules. But remember that it's the minor's capital gain, and has to be reported as income on the minor's tax return. Even if the minor is not required to file based on income, he or she would have to file a return to avoid having the IRS treat the entire proceeds of the sale as income, instead of just the gain.

Bob Sandler

Distributions are irrelevant. The account is no different than any other taxable investment account. If you have interest income, dividend income, capital gains/losses, royalties, etc., they would get reported on the beneficiary's tax return if there was enough income to require filing. It does not matter whether the income remains in the account or is withdrawn.

Yes, the same as any other investment, as you described. No "funky" rules. But remember that it's the minor's capital gain, and has to be reported as income on the minor's tax return. Even if the minor is not required to file based on income, he or she would have to file a return to avoid having the IRS treat the entire proceeds of the sale as income, instead of just the gain. ============== Agreed for pre-2012 sales, but not for post-2011 sales where basis is required to be reported on 1099-B. Gross income includes gain (or loss), not gross sales price, and since the IRS has both sales price and basis, they can no longer assume a basis of zero.

As to conversion of an account, why would one want to convert a post-tax UTMA account into a pre-tax 529 account which with an unqualified withdrawal could be taxed again? It may be better to use non-gifted money to fund the account, and let the UTMA account pay for related expenses that the 529 account won't cover.

Basis is *not* required to be unconditionally-reported for post-2011 sales. It only has to be reported if the shares being sold were purchased recently enough to be considered "covered" shares for purposes of the basis reporting rules.

If the shares were purchased before that, no basis has to be reported, even for post-2011 sales.

Basis is *not* required to be unconditionally-reported for post-2011 sales. It only has to be reported if the shares being sold were purchased recently enough to be considered "covered" shares for purposes of the basis reporting rules.

If the shares were purchased before that, no basis has to be reported, even for post-2011 sales. =============Read what I said again. I fully believe I already covered that. ("... where basis is required to be reported ...")

I didn't say anything with regard to post-2011 sales where basis isn't reported.

The expectation in this case is that the money in the 529 will all be for qualified educational expenses - and the only motivation for moving it is that the UTMA shows up on the student's FAFSA and the 529 does not appear to do so (verifying that though...).

A basic basis question... if some of the funds in the UTMA were a gift of stock/funds purchased long before, what is the minor's basis? Is it the originals basis of the purchaser (i.e. $10/ share when originally purchased in 1980) or is it the basis when gifted (i.e. $100/share in

Thanks,