Q. Why UGMA is not a favored way to save for college expense any more?
A. UGMAs or UTMAs are less attractive now because until a few years ago, those accounts were taxed at the child's lower tax rates! Now, such benefit is gone!
Today, any income above $2,000 for children young than 19 and full-time students younger than 24 is taxed at the parents' higher rates.
The first $1,000 of the child's investment income is tax-free, and the next $1,000 is taxed at the child's tax rate.
On the other hand, money in a 529 plan grows tax-deferred and earnings can be used tax-free for any qualified college costs. Furthermore, you can even get a state tax break (check your state's 529 plan for details).
If you live in Arizona, Kansas, Maine, Missouri, and Pennsylvania, you can even contribute to an out-of-state 529 plan and still receive state tax break.
A. UGMAs or UTMAs are less attractive now because until a few years ago, those accounts were taxed at the child's lower tax rates! Now, such benefit is gone!
Today, any income above $2,000 for children young than 19 and full-time students younger than 24 is taxed at the parents' higher rates.
The first $1,000 of the child's investment income is tax-free, and the next $1,000 is taxed at the child's tax rate.
On the other hand, money in a 529 plan grows tax-deferred and earnings can be used tax-free for any qualified college costs. Furthermore, you can even get a state tax break (check your state's 529 plan for details).
If you live in Arizona, Kansas, Maine, Missouri, and Pennsylvania, you can even contribute to an out-of-state 529 plan and still receive state tax break.
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