When Should a Child's UTMA or UGMA Account be Moved into a 529 College Savings Plan Account?

I have an old UTMA account for my daughter with Janus, with approximately $5,000 in gains. I opened this before they even had 529 college savings plans. I was thinking of transferring this to a 529 account with NYSaves.com. My daughter is 13. Is it worth transferring this UTMA account to a 529 and paying capital gains now, or is it best to leave it with Janus (and pay when I take it out for my daughter's college

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costs), and open a new 529 where I can make separate contributions? — S.J.G. An UGMA or UTMA bank or brokerage account is considered to be a child asset on the Free Application for Federal Student Aid (FAFSA). A child asset will reduce eligibility for need-based aid by 20% of the value

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of the asset. This is in contrast with parent assets, which reduce aid eligibility by at most 5.64% of the asset value. If a family expects to qualify for need-based financial aid, they should consider the difference in treatment of child and parent assets when making investment decisions. The FAFSA bases the expected family contribution (EFC) on student and parent income during the tax year prior to the award year. For example, the EFC during the freshman year in college will usually be based on income during the spring of the junior year and fall of the senior year. Families who expect to qualify for need-based financial aid should try to minimize capital gains during the prior tax year, since this will artificially inflate income. Eligibility for need-based financial aid is reduced by 50% of the student's income after subtracting a small income protection allowance. It is better to realize capital gains in the second prior tax year or earlier. Thus waiting until the year before the child enrolls in college to take the capital gains will hurt the child's eligibility for need-based aid twice, once as income and once as an asset. The treatment of the earnings as income can be addressed by realizing the capital gains sooner. (Contributions to a 529 college savings plan must be made in cash, so there's no way to move the money into the 529 plan without realizing capital gains.) The treatment of the investment as a child asset can be addressed by investing the money in a custodial 529 college savings plan. This 529 plan will be titled the same as the UGMA or UTMA account, with the child as both the beneficiary and the account owner. The College Cost Reduction and Access Act of 2007 changed the treatment of custodial 529 plan accounts from a child asset to a parent asset, effective starting with the 2009-10 award year. Families should also consider the tax impact of liquidating the UGMA or UTMA account. Short-term capital gains are taxed as ordinary income, while long-term capital gains are usually taxed at a lower rate. It is possible to have multiple 529 college savings plans for the same student. For example, one 529 plan could be a custodial 529 plan owned by the student while the other could be owned by the parent. Incidentally, New York opened its 529 college savings plan in September 1998. Other states had 529 plans available as early as 1996.