As I’ve noted before, I am including Topics on this Blog that people encounter at various stages in their life.  Henry just passed his six-month “Birthday”(?), so it’s time for me to stop procrastinating–and start his Investment Fund.  The Uniform Gifts to Minors Account (UGMA) and the 529 Education Plan are the two most popular.  There is an UTMA (Trust) which is virtually the same as an UGMA, and the Education IRA, with only a $2,000 maximum annual contribution; so, I am omitting them in this discussion.

“Gifting” is a strategy which people generally use to convey assets to others.  The maximum amount this year is $14,000 ($28,000 Joint), without the IRS assessing the gift tax. This is a popular Estate Planning Tool in that assets given to a Minor are usually taxed at a lower tax rate, and they remove them from the Donor’s Taxable Estate.  Actually, you can gift assets to as many people, of any age, as you wish.

Donors may give the same amount to both UGMAs and 529s.  The one primary difference is that a 529 can be pre-funded up to five years ($70,000/$140,000) at one time; however, further gifts would not be permitted for the next four years.  The pre-funding option would be advisable for Donors who are extremely elderly.   But, to me, the UGMA is a much better Plan because it is more flexible and will be discussed below.

529 Plans are offered by the various states.  Some have a form of pre-paid tuition, for a certain number of years, at a state university.  Other Plans, even by some or different states are tied-in with mutual fund companies.  Either of the 529 Plans might have penalties if the Beneficiary does not attend a state university, or leaves school early.

The state-sponsored plans, administered by mutual fund companies, limit the investment options to that company’s funds, and often just some of them–and perhaps not even their most popular ones. Whether you invest in the 529 that is administered by the state, through a mutual fund company, or a combination of the two, you can only withdraw the money for “educational purposes”.  Now, who’s to say what that means?

UGMA Accounts, on the other hand, can be opened at any bank, credit union, brokerage firm or mutual fund company.  As long as the investments are in “Financial Assets” (stocks, bonds, ETFs. mutual funds, cash deposits, etc.), they can be included.  Therefore, there are not any limitations whatsoever on the securities that the UGMA Custodian can invest in.  The Custodian can make the investment decisions, seek advise from a friend or engage a Financial Advisor for help.

Now, consider this: one thing that Bill Gates, Steve Jobs and Michael Dell have in common is that none of them finished college.  So, the “educational purposes” issue doesn’t come up if the UGMA Beneficiary choses to enroll in a Vocational, Apprenticeship Program or just starts working.   Also, there might be some non-educational expenses that might finance experiences that could be advantageous for the Young Woman’s or Man’s Career Development.

Suppose that your Son or Daughter (or Grandchildren) wish to attend an Art Program, while in high school, at a Museum, or a Hockey Camp in Canada, and you believe that it might broaden their experience, the UGMA can be tapped.  Likewise, the UGMA can be used to buy a car for your student to commute to school, perhaps some miles asway. Those would be impossible with a 529.  For UGMAs, the expense doesn’t have to be education-oriented; but can be financed at the Custodian’s discretion

There is one other benefit of the 529, and that is that it grows tax-free, and the growth would be tax-deferred, if withdrawn for educational purposes.  That word again. If the investments are going to be growth-oriented, especially in the early years, there probably won’t be much of a tax to be paid (if any) and, if the Beneficiary withdraws funds for college, the growth would be taxed as long-term gains, and at their assumedly low tax rate.  I believe that the considerably better flexibility–both with regard to investment options and usage–that the UGMA provides is well worth the taxes.

Lastly, when you establish a Plan to finance the Beneficiary’s Education, you don’t know where that road will lead them.  In-State or Out-of-State, change in schools or majors, living on campus or off and, most definitely, the number of years it will take to complete whichever Programthey chose.  And, don’t forget Grad or Professional School.

Now, before you have a heart attack adding-up the numbers in your head, take a deep breath and consider the resources: Parents and Grandparents might be able to contribute to the Plan; perhaps the Beneficiary will have part-time jobs (along the way); consider jobs on campus; and, lastly, it doesn’t have to be Harvard or Yale.

Completing the first two years at a community college, earning all of the basic required credits, perhaps living at home, might save more than a few bucks.  Look for scholarships, not only from the college, but from local Rotary Clubs, Mom or Dad’s employer, etc..  Starting early and contributing each year can certainly help.  And, seek the help of the college Counsellor, if their high school has one.

Lastly, Parents should not focus so much on saving for their Son or Daughter’s future that they forget to prepare for their own retirement.  Also, don’t force your Child(ren) to go to college, perhaps so you can brag–if that’s not what they want to do.  You have time to prepare–especially if the Kid is only six months old.  Money invested for the long-term can grow over time.

There’s one mistake not to make: invest based on the Child’s age, not yours.  When I was an FA, I had elderly clients who wanted to invest UGMA money in CDs, Utilities and Bonds.  When our FA asked about what investment objective we wanted for Henry’s UGMA, I told him that we were going to “let it fly”.

Saving for college is like driving a train: go fast (aggressive) when you are far from the station, slow-up a bit (somewhat defensive) when you hit soft patches and, as you approach the station, slow-up (more conservative)–doing so gradually.  But, still keep some growth in the portfolio once He or She starts college–because, you’re not there yet.  Remember the train’s final lurch!



  1. #1 by Marissa Huber on August 11, 2013 - 2:23 AM

    What a lucky grandbaby! Thank you for the lesson on this, Cheeks. It was a lot to learn! I appreciate it.

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