529 plans vs. UTMAs: tips to finding the right plan for college savings.

• Author: Franklin, Joyce L.
• Position: Financialplanning

Cindy and James, a married couple in their 30s, have two small children. As they manage their cancers, they also proactively save for their children's college education. However. Candy and James are not sure if they are saving for college in the right way. Sound familiar.

Three Ways to Save for College

There are three main college savings look: 529 College Savings Plans, Uniform Transfer to Minors Accounts UTMAs and trusts. No age limits or residency requirements exist for any of the vehicles mentioned below.

529 College Savings Plan: Created under IRC See. 529, and known as "qualified tuition plans." stales or slate agencies sponsor these accounts. A 529 account allows for tax-free savings as long as the funds are used for college. A college saver also known as an "account holder" or "account owner" establishes an account for a student the "beneficiary" to pay for eligible college expenses. Generally, a parent or grandparent is the account owner.

UTMA: An UTMA is set up by a parent. grandparent or other to transfer ownership of cash or other assets to a minor; this type of account is also known as a custodial account. The child owns the assets immediately and, upon reaching the age of majority (usually 18 or 20 depending upon the stale of residency) the child gains control of the assets to do with them whatever he or she desires.

Trust: A trust can be set up specilically in fund a college education. It's expensive an attorney must draft the trust and annual tax returns must be filed to report investment income and sales. Given the expense, a trust should only be used to save for college if an UTMA or 529 plan is not appropriate, Use a trust as an UTMA alternative when you want to limit the child from controlling the assets.

Enter the Financial Planner

During (he discovery process with Cindy and James, they explained their desire to fund lour years of private college for each child without giving their children access to any of this money when they turned 18. Their current savings were in both 529s and UTMAs.

Based upon their goals, the UTMA assets were inappropriate. These assets were subject lo income and capital gains tax. and transactions required a tax return filing further eroding the family's wealth and increasing the cost of this savings strategy.

Conversely, the assets, earnings and growth in the 529 plum are tax-free as long as withdrawals are used in pay higher education expenses. In this ease we advised the clients to spend down...