Should Parents Move College Savings Out of a UTMA Account?

My parents have been saving for my college through a UTMA account. They've been thinking about moving it to another type of account. Is there an advantage to doing this while I'm planning my college transfer?

Switching from a UTMA (Uniform Transfers to Minors Act) account to a different type of savings account can have some benefits, particularly in terms of financial aid calculations for college. When determining your Student Aid Index (SAI), colleges consider 20% of assets in a student’s name, which would include a UTMA account, as available for college expenses. This can significantly reduce the amount of need-based financial aid a student is eligible to receive.

Conversely, parental assets, including ones in custodial 529 plans, are assessed at a rate of 5.64% or less. In other words, this percentage of parental assets is considered by the financial aid calculation to be available for college expenses. This means that more of your family's assets will be protected if the money is moved from a UTMA account to a 529 plan or other type of savings plan owned by the parents, and could potentially result in a higher amount of financial aid.

However, it's important to note that each family's financial situation is unique and going through this type of transfer might have tax implications and could be subject to certain tax penalties. In addition, when the UTMA is liquidated, capital gains taxes may apply. Therefore, before making such a move, it would be wise to consult with a financial advisor or a tax professional to understand all the potential costs and benefits.

Also, this kind of move requires strategic thinking because the liquidation of the account has to take place well before the financial aid applications are filed. Assets are usually measured as of the date of the form's submission, and less money in your name will lower your SAI. Remember to time this decision wisely if you decide to proceed.

In sum, while moving assets out of a UTMA account may result in more aid, the process to do so can be complex and require careful planning. Consulting a financial advisor or tax professional can provide necessary guidance and help avoid any unnecessary expenses or penalties.