Chris Conway: ‘I have three children ages 14, 12, and 9. We have one UGMA [Uniform Gifts to Minors Account] for each child set up years ago. The current values are approximately, $18,000, $17,000, and $15,000, respectively. The accounts are actually DRIPs tied to Verizon stock. Should I consider switching one or more of these to a good 529 Plan – like the Missouri Plan? (And if so, WHEN??) How will the gains be treated if we liquidate the UGMAs to fund the 529s? (And, we do have to ‘liquidate’ don’t we? I can’t just ‘roll it over’ can I? Or should I keep them where they are? Given the market lately, I’m not sure where the price of Verizon will be when child number one is ready for college. I also understand that these two plans (UGMA vs. 529s) may be treated differently by the college financial aid process. Which one would result in a lower family financial responsibility in the college aid process?’
☞ That’s a good chunk of money you’ve set aside for college – you should take pride in that. But it’s really dangerous for your children’s future to be tied to the performance of a single stock, no matter what method is used to hold the investments, so I would suggest liquidating these accounts for that reason alone. You WILL have to sell the shares to move the money into a 529, but as long as you are planning to use the money for college, all future gains will be tax-free under those circumstances, and you will get far better diversification. (The younger children are subject to the kiddie tax, which means gains over $1,500 will be taxed at the parents’ tax rate; but gains for the 14-year-old will all be taxed at his low rate.)
The Missouri plan is an excellent one, with the lowest expenses of any plan that includes international equities (for extra diversification). The Utah plan has lower expenses, but is limited to US stocks only. If you do use the Missouri plan, my friend the estimable Less Antman recommends the 100% Equity option, which will still be a big step down in risk from your current Verizon-only approach. But consider the Managed Allocation Option, which will move more of the funds into less volatile bonds and money market accounts as your children get closer to college age.
As for college aid, there is an advantage to the 529 account, Less advises, but it might not apply to you. A 529 account with the parent as owner of the account is treated as a parental asset, and only around 6% of it is treated as being available each year for a child’s college costs, while 30% of the child’s own assets, including UGMA/UTMA accounts, are considered available. The problem you face is that you cannot switch UGMA funds back to your name, so the 529 account, if funded with the assets from the UGMA account, must itself be designated that way.
(One possible way around this is to spend the UGMA funds for optional expenses of the children themselves, like cars, if you’d be buying them cars, computers, summer camp, and so on. Use other money to fund the 529 plans in your name. But note that you cannot use UGMA money for parental responsibilities – like room and board and clothes – so you’d be hard-pressed to spend all that UGMA money on them without being wasteful.)
The main thing: you have all your kids’ college eggs in a single basket. I’d be sure to fix that.
(Less did most of the work on this column – thanks, Less!)