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APRIL 9, 2019

Can I transfer funds from my custodial accounts to a 529 (and vice versa)?

Answered by
Richard Polimeni
Director, Education Savings Programs, Bank of America
You can move money from a custodial account, such as an UGMA (Uniform Gifts to Minors Act) or an UTMA (Uniform Transfers to Minors Act), to a 529 plan. But you can't do the reverse — transfer or convert from a 529 to a custodial account — without adverse tax consequences.

Why might you want to move from an UTMA or UGMA custodial account to a 529 plan?

There are two primary reasons for considering a transfer from a custodial account to a 529:
  • The tax advantages of 529 plans
  • Custodial accounts can have a negative impact on your child's eligibility for federal financial aid
"Moving to a 529 may improve the chances of your child receiving federal financial aid."
— Richard Polimeni, director, Education Savings Programs, Bank of America
"For starters, income over a certain threshold earned by investments in a custodial account may be immediately taxable, while investment income in a 529 isn't taxed while you keep your investment in the plan, and isn't taxed at all if it goes to pay qualified education expenses," says Richard Polimeni, director, Education Savings Programs for Bank of America. This can be especially helpful if the beneficiary has many years to go before entering college.
Moving existing custodial assets to a 529 may also improve the chances of your child receiving federal financial aid. Custodial accounts are considered the student's asset in federal financial aid calculations, and students are expected to chip in a larger percentage of their assets for college costs than are parents or grandparents who own a 529 with that student as a beneficiary.
The government's formula to determine the "expected family contribution" for a college education takes into account 20% of the child's assets, including custodial accounts, each year. But for parents' assets, which would include a 529 plan for their child, the formula considers only 5.6% to be available annually to pay for college.

What are the disadvantages of transferring from a custodial account to a 529?

When you transfer assets from a custodial account to a 529, the account doesn't operate under the same rules as a traditional 529 account would. The account becomes what is often called a custodial 529 account, and a different, more restrictive set of rules comes into play compared with a traditional 529 account. "For instance, you can't change the beneficiary of a custodial 529 as you could with a traditional 529," Polimeni says. Assets in a custodial account are considered irrevocable gifts to the beneficiary. "And once assets from a custodial account are transferred to a 529, they're subject to the qualified-usage rules for custodial assets."
Additionally, while custodial assets can be used for most purposes as long as they are used for the benefit of the beneficiary, once transferred to a 529, if the assets aren't used to pay for eligible education expenses, you'll have to pay federal and possibly state and/or local income tax, in addition to a possible 10% additional federal tax on the earnings portion of the withdrawal.

Is the transfer process complicated?

Not at all. Once you've decided to transfer custodial account assets to a 529 plan, it's mostly a matter of filling out paperwork, but there's one big caveat: To move money into a 529 from a custodial account, you'll first have to sell the UGMA's or UTMA's assets and pay capital gains tax, if applicable, on investment profits. However, this one-time cost may be well worth it when you consider the tax-free growth potential of a 529 plan, as well as the more favorable federal financial aid treatment once money is in the 529.
Help when you want it
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.


Before you invest in a Section 529 plan, request the plan's official statement from your Financial Solutions Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider carefully before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection against creditors that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

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