MoneyLife

What is UTMA

By Lavall Chichester
UTMA

The Uniform Transfers To Minors Act (UTMA) account is a tax-advantaged custodial account for kids that enables parents and other family members to invest and save for more than just college. Funds in the UTMA account can be used for future goals such as but not limited to buying a first car, down payment on the house or a wedding day. The custodian of a UTMA account can be a parent, grandparent, relative, or friend. Each UTMA account is set up and managed by its custodian until the child is of age. The custodian picks at what age the beneficiary will take control of the account. Depending on the family’s state, this is normally between 18 and 25. UNest Investment Account for Kids makes it easier than ever before for families to receive the benefits of UTMAs. Up to $2,200 in annual earnings in UTMA grow in a tax-advantaged way. The first $1,100 of the earnings is completely tax-free. The next $1,100 is taxed at the child’s tax rate. Anything exceeding $2,200 is taxed at the parents’ tax rate. This threshold is applicable to gains in the account and not to the original contributions.

2. What is a 529 plan?

A 529 plan is a tax-advantaged savings plan that encourages parents to save for their child’s future education costs. 529 plans are offered by states, state agencies, or educational institutions. Each state sponsors at least one type of 529 plan. If you use funds on unqualified educational expenses, in 529 plan you will lose your tax advantages and the earnings portion is subject to a 10% penalty. You can invest in almost any state 529 plan, not just your own state’s 529 plan. This plan can be used to pay for college costs at any qualified college, nationwide. In most plans, your choice of college is not affected by the state that sponsored your 529 college savings plan. For example, You can be a California resident, invest in an Oregon plan and send your child to college in Texas. 

3. Key difference(s) between UTMA and 529?

Both 529 plans and UNest UTMA custodial accounts provide a tax-advantaged way for parents and others to help save for a child’s tuition and other educational expenses. UNest’s Investment Account for Kids offers a significant benefit to parents that are looking for a flexible way to save for all the future life stages your child will experience. This may or may not include education. This flexibility is especially important since children may end up not going to college or receive financial aid or scholarship.

If the account holder uses funds on unqualified educational expenses, in 529 plan they lose their tax advantages and the earnings portion is subject to a 10% penalty. Additionally, UTMA is a Federal product and is not attached to the state, while 529s are sponsored by the state and each of 50 states has its own plan. Lastly, in 529 the investment choices are limited to mutual funds and ETFs and asset allocation can be only changed twice a year; in UTMA parents can pick individual stocks, alternative investments and even crypto currency and have more control on the portfolio allocation throughout the year. 

4. What is a Coverdell ESA plan?

According to Investopedia, “A Coverdell education savings account is a tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be 18 years old or younger when the account is established. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000.”

5. Is a Coverdell ESA the same as a 529?  

Up until a few years ago Coverdell ESAs held a distinct advantage of 529s in allowing parents to use the funds they saved for a broader range of education costs. Whereas 529s could only be used for college-related expenses, a Coverdell ESA’s funds could also be applied to other education fees such as private High School. This distinction was eliminated by the Tax Cuts and Jobs Act. ESAs do still offer more options in where a consumer opens an account and the types of investment they contain. This can include individual stocks and bonds, mutual funds and exchange-traded funds (ETFs), and real estate investment trusts (REITs) .

6. Is a 529 or ESA or UTMA better?

For the majority of families a UTMA account easily makes the most sense. In contrast to 529 and ESA plans that can only be used for qualified educational expenses, you can use the funds you invest in UTMA for any expense that benefits the child named on the account. If an account holder uses funds from a 529 plan for non-education related expenses, they lose tax advantages and earnings are subject to a 10% penalty.  Parents using UTMAs have the flexibility to plan and save ahead for all the important life stages that their children will experience — college, first car, or a down payment on the home. In addition, parents have more control of what they can save and invest in, while investment choices in 529 and ESA accounts are very limited.

529s and ESAs also confront parents with voluminous amounts of paperwork. The whole process of setting up a 529 account takes an average of eight hours, with only a limited chance that the selected program is aligned with their requirements and situation. In contrast, the UNest Investment Account for Kids makes it easy for families of all income levels and backgrounds to set up and manage savings and investment plans for their kids. UNest account holders can also receive gifts for their children’s UNest accounts from family and friends via the UNest mobile app, or from companies like blue chip brands such as Disney+, AT&T, Levis etc through the UNest partner program.

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