• Comparing Education Savings Accounts & Plans

 

 

FREQUENTLY ASKED QUESTIONS:

 

What is a Section 529 Plan? 

A Section 529 plan is a savings plan that offers tax-advantages intended to encourage saving for future education costs.

 

What are UGMA/UTMA Custodial Accounts?

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfer to Minors) are custodial accounts which are used to hold and protect assets for a minor beneficiary.

 

What are features and benefits of a Section 529 Plan or a UGMA/UTMA Custodial Account?

The comparative chart below was prepared to provide you with information on two different investment vehicles that may be used to invest for education expenses. * The chart provides information such as eligibility, taxation, investment options and impact on financial aid.

 

What should I consider before starting an education savings plan?

Before you invest in or contribute to a Section 529 plan or a UGMA/UTMA custodial account, consider you or your designated beneficiary’s investment objectives, risk tolerance, time horizon and liquidity needs.

Section 529 Plan or UGMA/UTMA comparison chart

 

SECTION 529 PLAN

CUSTODIAL ACCOUNT (UGMA/UTMA)

Description

Tax-advantaged way to fund the education expenses of a designated beneficiary.1

An account in which a custodian holds money or other property that has been gifted or transferred to a minor, pursuant to applicable state law.

Eligibility limits for contributors

None.

No eligibility limits for contributors

None with regard to dollar maximums. However, state law may limit the types of transfers that may be made to the minor.

No eligibility limits for contributors with regard to dollar maximums. However, state law may limit the types of transfers that may be made to the minor. 

Maximum beneficiary age for contributions to account

No age limit.

No maximum beneficiary age for contributions to account

Statutory vesting age, which may range from 18 to 25, depending on the state law that governs.

Maximum beneficiary age for contributions to account:

Statutory vesting age, which may range from 18 to 25, depending on the state law that governs.

Age at which withdrawals generally are required to be made

No age limit.

No age limit at which withdrawals generally are required to be made

No age limit, but the custodian has the responsibility to transfer the assets to the minor upon attainment of the vesting age.

No age limit at which withdrawals generally are required to be made, but the custodian has the responsibility to transfer the assets to the minor upon attainment of the vesting age.

Minimum contribution to establish an account

Varies by plan.

Minimum contributions to establish an account varies by plan.

Varies by provider/investment.

Minimum contribution to establish an account varies by provider/investment.

Maximum contributions

• Varies by plan. However, most plans allow contributions in excess of $300,000 per beneficiary.

 

• Federal gift taxes could apply. Under the five-year gift rule, you can take advantage of a gifting provision that allows you to contribute up to $75,000 ($150,000 for married couples filing jointly) per beneficiary in a single five-year period, federal gift tax free, as long as there are no further gifts to the beneficiary in the same five-year period.2

Maximum contributions:

• Varies by plan. However, most plans allow contributions in excess of $300,000 per beneficiary.

 

• Federal gift taxes could apply. Under the five-year gift rule, you can take advantage of a gifting provision that allows you to contribute up to $75,000 ($150,000 for married couples filing jointly) per beneficiary in a single five-year period, federal gift tax free, as long as there are no further gifts to the beneficiary in the same five-year period.2

For 2019, any individual may contribute $15,000 ($30,000 for married couples filing jointly) per beneficiary per year without federal gift tax consequences, but there are no statutorily imposed maximum contribution amounts.

Maximum contributions:

For 2019, any individual may contribute $15,000 ($30,000 for married couples filing jointly) per beneficiary per year without federal gift tax consequences, but there are no statutorily imposed maximum contribution amounts.

Control of assets

Participant/account owner maintains control of account.

Custodian controls the account until minor reaches the vesting age. When minor attains the vesting age, the custodian has the responsibility of transferring the assets to the minor.

Ability to change beneficiaries

• The participant/account owner can change the designated beneficiary to a member of the family of the designated beneficiary (as defined in the Internal Revenue Code) without adverse income tax consequences.

 

• If assets from a UGMA/UTMA account are contributed, the custodian may not change the designated beneficiary, except as permitted by applicable law.

 

• A change of beneficiary could potentially be subject to federal gift tax if the new beneficiary is in a younger generation than the prior beneficiary or is not a member of the family of the prior beneficiary.

 

• If the new beneficiary is in a generation two or more generations younger than the prior beneficiary, the transfer may be subject to the generation-skipping transfer tax.

Ability to change beneficiaries:

• The participant/account owner can change the designated beneficiary to a member of the family of the designated beneficiary (as defined in the Internal Revenue Code) without adverse income tax consequences.

 

• If assets from a UGMA/UTMA account are contributed, the custodian may not change the designated beneficiary, except as permitted by applicable law.

 

• A change of beneficiary could potentially be subject to federal gift tax if the new beneficiary is in a younger generation than the prior beneficiary or is not a member of the family of the prior beneficiary.

 

• If the new beneficiary is in a generation two or more generations younger than the prior beneficiary, the transfer may be subject to the generation-skipping transfer tax.

No. Once a gift or transfer is made, the named minor cannot be changed.

No ability to change beneficiaries. Once a gift or transfer is made, the named minor cannot be changed.

Ability to transfer or roll over assets

• Assets can be transferred or rolled over federal income tax free to another 529 plan for the same beneficiary once every 12 months, or for a member of the family of the beneficiary. Indirect rollovers must be completed within 60 days.

 

• 529 assets can be rolled over into an Achieving a Better Life Experience (ABLE) account tax-free. Rollover amounts cannot exceed the ABLE account contribution limit.

Ability to transfer or roll over assets:

• Assets can be transferred or rolled over federal income tax free to another 529 plan for the same beneficiary once every 12 months, or for a member of the family of the beneficiary. Indirect rollovers must be completed within 60 days.

 

• 529 assets can be rolled over into an Achieving a Better Life Experience (ABLE) account tax-free. Rollover amounts cannot exceed the ABLE account contribution limit.

• Assets can be transferred between custodial accounts for the same minor at any time, provided the accounts have the same title. Both must be UGMA (or UTMA), with the same state law governing, same custodian and the same vesting age.

 

• Assets from a UGMA/UTMA account also may be contributed to a 529 plan or education savings account for the same minor. Because cash must be contributed to 529 plans and ESAs, the custodial account may be subject to a capital gains tax liability as a result of the liquidation of securities in the custodial account.

Ability to transfer or roll over assets:

• Assets can be transferred between custodial accounts for the same minor at any time, provided the accounts have the same title. Both must be UGMA (or UTMA), with the same state law governing, same custodian and the same vesting age.

• Assets from a UGMA/UTMA account also may be contributed to a 529 plan or education savings account for the same minor. Because cash must be contributed to 529 plans and ESAs, the custodial account may be subject to a capital gains tax liability as a result of the liquidation of securities in the custodial account.

Taxation on earnings

The earnings portion of a withdrawal is federal income tax free as long as withdrawals are used for education expenses.1

In 2019, the first $1,100 of a child’s income generally is tax-exempt, the next $1,050 of unearned income generally is taxed at the child’s tax rate, and unearned income over $2,200 generally is taxed at the parent’s tax rate if the child is under age 18, or the child is age 18 and does not have earned income that is more than half of his or her financial support, or is a full-time student that is at least age 19 and under age 24 who does not have earned income that is more than half of his or her financial support if at least one parent is living at the end of the tax year and the child is not filing a joint return for the tax year.

Taxation on earnings:

In 2019, the first $1,100 of a child’s income generally is tax-exempt, the next $1,050 of unearned income generally is taxed at the child’s tax rate, and unearned income over $2,200 generally is taxed at the parent’s tax rate if the child is under age 18, or the child is age 18 and does not have earned income that is more than half of his or her financial support, or is a full-time student that is at least age 19 and under age 24 who does not have earned income that is more than half of his or her financial support if at least one parent is living at the end of the tax year and the child is not filing a joint return for the tax year.

Taxation of Withdrawals

Withdrawals used for education expenses are federal income tax free. (See “How can funds be used?” below.)

Not applicable. (See “Taxation on earnings” above.)

Taxation of withdrawals is not applicable. (See “Taxation on earnings” above.)

How can funds be used?

Qualified education expenses of the designated beneficiary, which may include:1

 

• Tuition and fees

 

• Room and board3

 

• Books, required supplies and equipment

 

• Computers or peripheral equipment, computer software, or Internet access and related services

 

• Certain expenses associated with special needs beneficiaries

 

You can take a distribution, without federal tax consequences, from a 529 of up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or religious school. State tax treatment may vary.

How can funds be used?

 

Qualified education expenses of the designated beneficiary, which may include:1

 

• Tuition and fees

• Room and board

• Books, required supplies and equipment

• Computers or peripheral equipment, computer software, or Internet access and related services

• Certain expenses associated with special needs beneficiaries

You can take a distribution, without federal tax consequences, from a 529 of up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or religious school. State tax treatment may vary.

No restrictions except that funds may only be paid to or for the benefit of the named minor.

There are no restrictions on how funds can be used except that they may only be paid to or for the benefit of the named minor.

Where can funds be used?

Virtually any accredited college or university in the U.S. (includes graduate schools, community colleges and accredited vocational and technical schools). Some foreign schools are also eligible. Institutions must be eligible to participate in U.S. Department of Education student financial assistance programs.

Funds can be used for virtually any accredited college or university in the U.S. (includes graduate schools, community colleges and accredited vocational and technical schools). Some foreign schools are eligible. Institutions must be eligible to participate in U.S. Department of Education student financial assistance programs.

There is no limit as to where the funds may be used, provided they are paid to or for the benefit of the minor.

There is no limit as to where the funds may be used, provided they are paid to or for the benefit of the minor.

Investment options

• Varies by plan. Most plans offer investment portfolios consisting of underlying mutual funds or individual mutual fund options.

 

• Investment options typically range from age-based options in which the asset allocation mix adjusts based on the age of the beneficiary, to fixed allocation portfolios that range from conservative to aggressive.

Investment options:

 

• Varies by plan. Most plans offer investment portfolios consisting of underlying mutual funds or individual mutual fund options.

• Investment options typically range from age-based options in which the asset allocation mix adjusts based on the age of the beneficiary, to fixed allocation portfolios that range from conservative to aggressive.

No restrictions other than those imposed by the relevant state UGMA/UTMA laws, which typically state that a custodian is subject to the “prudent person rule” but is not limited by any other statute restricting investments by fiduciaries.

There are no restrictions on investment options other than those imposed by the relevant state UGMA/UTMA laws, which typically state that a custodian is subject to the “prudent person rule” but is not limited by any other statute restricting investments by fiduciaries.

Taxation of nonqualified withdrawals

Withdrawals not used to pay for qualified higher education expenses as defined in the Internal Revenue Code are considered nonqualified withdrawals.

 

• The earnings portion of nonqualified withdrawals is subject to federal (and potentially state and/or local) income tax, plus a 10% additional federal tax. The additional tax does not apply to withdrawals upon the beneficiary’s death, disability, military academy attendance or receipt of a scholarship, as long as the amount withdrawn does not exceed the amount of such scholarship.

 

• State tax treatment will vary for distributions taken from a 529 to help pay for tuition at an elementary or secondary public, private or religious school.

Not applicable.

Taxation of nonqualified withdrawals is not applicable.

Impact on federal financial aid

More Favorable

Generally treated as an asset of the parent, which is weighted at 5.6% toward the expected family contribution (EFC) formula. Qualified withdrawals are not considered to be income to the parents or student in the EFC formula.4

Impact on federal financial aid:

 

More Favorable: Generally treated as an asset of the parent, which is weighted at 5.6% toward the expected family contribution (EFC) formula. Qualified withdrawals are not considered to be income to the parents or student in the EFC formula.

Less Favorable

 

Treated as an asset of the beneficiary, which is weighted at 20% toward the expected family contribution formula.4

Impact on federal financial aid:

 

Less favorable. Treated as an asset of the beneficiary, which is weighted at 20% toward the expected family contribution formula.4

 

*Merrill Lynch has prepared the compariosn chart from sources and data we believe to be reliable. The information is general in nature and should not be considered legal or tax advice. This information is provided for general educational purposes only, and you should bear in mind that laws of a particular state and your particular situation may affect the information contained herein. You should consult your tax advisor regarding your specific tax situation. Merrill Lynch expressly disclaims any responsibility or liability for any losses or damages arising out of the use of the chart.

 

How to get started with an education savings plan

If you’re exploring ways to prepare for education expenses, call your Merrill Lynch financial advisor to discuss whether a Section 529 Plan or a UGMA/UTMA Custodial Account is right for you.