There are custodial accounts that can be set up for minor children if you want to save money on their behalf for college or general purposes. The Uniform Gifts to Minors Act (UGMA) was originally introduced in 1956, and it established guidelines for UGMA accounts for minors.
If you establish this type of account for one of your children or grandchildren, there is no contribution limit, and multiple people can contribute into the account. In Ohio, the beneficiary will have access to the assets when they are 18, and the account terminates at that time.
A UGMA account can hold cash, insurance policies, stocks, bonds, and mutual funds.
The first $1150 of unearned income is distributed tax-free, and the next $1150 is taxed at a rate of 10 percent, which is the child’s rate. Anything that exceeds $2300 will be taxed at the parents’ rate.
Resources in the account can be used for any purpose that benefits the child, and the assets are considered to be the property of the child if they apply for student aid.
Uniform Transfers to Minors Act (UTMA)
The National Conference of Commissioners on Uniform State Laws recommended the Uniform Transfers to Minors Act in 1986, and it has been adopted by most states, including Ohio.
All the details are the same as UGMA accounts with a couple of exceptions. The age of termination and majority for UTMA accounts in Ohio is 21, and any type of property can be transferred into a UTMA account.
Section 529 Savings Plans
If you are going to be setting aside resources to pay a student’s college tuition, you may want to opt for a Section 529 savings plan. This name comes from the Internal Revenue Service rule that governs these accounts.
With the custodial accounts that we have looked at to this point, the untaxed earnings that are generated by the after-tax assets that are held by the account are taxable upon distribution. This is not the case if you establish a Section 529 savings plan.
All the assets in the account can be withdrawn tax-free as long as they are used to pay for approved college expenses. Plus, the rules were changed in 2018 to allow for the utilization of $10,000 annually to cover K-12 education costs.
You can defund the account if you choose to do so, but there would be applicable fees and penalties. Assets in a Section 529 plan are looked upon as the property of the parent or grandparent, and this is beneficial for student aid eligibility purposes.
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