Should You Change Your Strategy?
The earnings in UGMAs and UTMAs are now taxed at the parent's income tax rate from the opening of the custodial account until the child turns 18. Previously, these accounts were taxed at a lower kiddie rate for part of that time. This change erases part of the benefit of those plans over a 529 plan and could mean higher taxes for you.
529 plans are investment programs sponsored by the states and given special tax status in order to encourage saving for future college expenses. There are two types of 529 plans (Qualified Tuition Plans):
- pre-paid tuition plans
- college savings plans
Some people hesitated to use 529 plans because the tax benefits of UGMAs and UTMAs had no expiration dates, while the favorable tax treatment given to 529 plans was set to expire after 2010. The pension reform law made these tax benefits permanent. As a result, 529 plans have become more attractive.
It's important to be aware of changes the pension reform law made in college savings plans, such as the fact that as of July 1, 2006, assets in pre-paid tuition plans and college saving plans will be treated much the same for federal financial aid purposes. These funds will be treated as parental assets when calculating the expected family contribution.
To make the most of your contributions to these tax-favored plans under the new tax rules, it's a good idea to discuss them with a tax professional first. Even if you have done so in the past, it could benefit you financially to do so again to see how the pension reform law will affect you and whether you should make a change in your college savings strategy.
