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Rolling Over A Ugma Into A 529 College Plan
The 529 plan was created under section 529 of the Internal Revenue Code and it is sponsored by the state governments across the United States. A 529 college plan is a tax advantaged education savings vehicle. |
Because of changes brought about to the Internal Revenue Code in the beginning of 2002, 529 college plans are now one of the best savings vehicles in terms of tax treatment when the withdrawal is used for education related expenses. However, the tax exemption on the earnings on withdrawals is due to expire on December 31, 2010 unless the Congress decides to extend.
The good news is that you can now rollover a UGMA plan into a 529 college plan. You can redeem the assets from a UGMA plan but the bad news is that you will have to pay income tax on any gains after the redemption. Once the proceeds from the UGMA plan is contributed to a 529 college plan, the minor of the UGMA plan must be named both as the account holder and beneficiary of the 529 college plan and this cannot be changed.
However, the only way to rollover a UGMA to 529 college plan is to meet a certain requirements. You must first liquidate the assets of the UGMA account as 529 college plan accepts just cash contributions. You should consult your tax advisor on the liquidation. If you withdraw money from a 529 college plan, the withdrawal must be for the benefit of the beneficiary, the child in this case. If the withdrawals are not used for educational purposes, you will have to federal and state taxes along with a 10 percent federal penalty.
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