Can You Move Money From UGMA or UTMA Account to 529 Plan?
Image: Bigstock
If you set up a custodial account years ago to save for your child’s future, you may now wonder whether that money will work harder in a 529 plan. After all, a 529 plan offers tax-free growth when used for qualified education expenses and is a favorite tool for college savings. But transferring funds from a UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) account into a 529 is not simple; it comes with rules, trade-offs and potential tax consequences.
Let us break down what actually happens when you move assets from one account to the other, and why families often consider doing so.
Understanding the Basics
UGMA and UTMA accounts allow adults to gift money or investments to a minor. Once contributed, the assets legally belong to the child. The custodian (usually a parent) can manage the account, but every dollar must ultimately be used for the child’s benefit, be it paying for a summer camp, a laptop or a private school.
A 529 plan, by contrast, is designed specifically for education savings. Money in the account grows tax-free, and withdrawals used for tuition, housing or other qualified costs are not taxed. The account is usually owned by a parent but designated for a child beneficiary.
So the question is: can you shift custodial assets into the tax-advantaged 529 plan without breaking any rules? The answer is yes, but it is not a straight transfer.
Steps to Transfer Money from UGMA or UTMA to 529 Plan
You can move money from a UGMA or UTMA to a custodial 529 account, but you will need to follow several steps and understand what changes along the way.
Any non-cash assets in the UGMA or UTMA, such as stocks, ETFs or mutual funds, must be sold. Federal law only allows cash contributions to 529 plans. Selling investments may trigger capital gains taxes, potentially leaving you with a surprise tax bill.
Once the assets are liquidated, the proceeds can be moved into a custodial 529 plan that keeps the same beneficiary. You cannot rename the beneficiary or mix these funds with regular 529 contributions. The money still legally belongs to the child, and when they reach the age of majority (usually 18 or 21, depending on the state you live in), control of the account must be handed over to them.
What Changes After the Move
After being transferred to a 529 plan, dollars get the benefit of tax-deferred growth. If the funds are eventually used for qualified education costs, earnings come out tax-free. This is a positive compared with UGMA or UTMA accounts, wherein dividends and capital gains are taxable each year, often at the parents’ or child’s tax rate, whichever is higher under the “kiddie tax” rules.
However, the move limits your flexibility. Money in a UGMA or UTMA can be used for any expenses that benefit the child. After transferring it into a 529 plan, the funds can only be used for education. Withdrawals for non-educational purposes will trigger ordinary income tax on the earnings portion in addition to a penalty.
Because these are still considered the child’s assets, you lose the ability to change the beneficiary in the future. Regular 529 plans allow you to shift beneficiaries between siblings or relatives without penalty, but not if the money originated in a custodial account.
How it Affects Taxes
On the tax side, selling assets in the UGMA or UTMA before the transfer may trigger capital gain taxes. The amount depends on how much the investments have appreciated. That is why many advisors recommend reviewing the account’s holdings and calculating the tax exposure before initiating the move.
Bottom Line
Yes, you can transfer funds from a UGMA or UTMA to a 529 plan, but it is more like a conversion than a true transfer. You must liquidate investments, pay due taxes and then reinvest the proceeds into a custodial 529 plan under the same child’s name. The payoff is potentially greater long-term growth through tax-free compounding and a better position for financial aid. Before making the move, it is smart to consult with a tax advisor or financial planner familiar with your state’s rules.