ugma to 529 conversionAs I’m sure you can imagine, I get tons of questions here on the blog. Some of them are really easy to answer. Others require extensive research.

When that doesn’t work, I’ll then bring in the cavalry soliciting some of my CFP® peers to assist.

Recently, a reader emailed me with a question about converting her child’s UGMA custodial account to a 529 college account.

Initially, the question stumped me.  It was the use of the word “conversion” that left me unsure about the answer.  Luckily, I have smart colleagues.  :)

Michael Kitces, CFP® who is Partner and Director of Research of Pinnacle Advisory Group, Inc and also authors the popular blog Nerd’s Eye View became a battle buddy and helped me answer the question.    Thanks Michael!

UGMA to 529 Conversion – Can it be done?

Here was the reader’s question:

I’d like to convert my son’s UGMA account to a 529. Do you know how much you can convert a year? Are you limited to the gift amounts or are there different
rules? Right now the account is about $120,000. My father is the custodian and
he has taken some money out of it for his own use so I’d like to get it out of
his hands.

Michael’s awesome response:

Technically, It’s not a ‘conversion’, it’s simply an investment by the UGMA (the child’s money) into a 529 account (also the child’s money). It can be invested all at once, regardless of amount, as it’s not a gift or transfer.

However, the 529 account itself should be flagged as an UGMA 529 on the account forms, as the UGMA status does limit the transferability of the 529 to other beneficiaries (as 529 money has to be used for that child).

If the child isn’t of the age of majority to take control of the account, though, the father as custodian would have to do it, which may create separate problems depending on their relationship.

Requirements of the UGMA

Also, it’s worth noting, not to muck the family situation further, but it is required to use the UGMA assets for or on behalf of the child.

The UGMA money could be spent on things for the child’s benefit, from summer camp to computers to schooling, but if the father is really just taking the money ‘back’ out of the UGMA for his personal use, it’s actually a breach of fiduciary duty and legally actionable.

It’s rare, but there are children who have sued their parents and won for what was effectively breach of fiduciary duty as the UGMA/UTMA custodian and embezzlement of the child’s money.

I hope that’s helpful food for thought!


Why, yes, Michael. It surely was!!


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Comments | 1 Response

  1. says

    Jeff and Michael,

    This is a very helpful article! I know it was written a year and a half ago, but it is very relevant.

    I had a client with a 529 UTMA/UGMA account this past year, that was having difficulty filling out the financial aid forms, due to the way some colleges will choose to categorize 529 accounts.

    I wrote a couple of blog posts that may be of interest to you both, as well as your clients.

    I hope they are helpful!

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