I saw this “Ask Ed Slott” item in an online Financial Planning magizine articel asking about the kiddie tax and UGMA accounts – it seems to imply that you can “cash out” of an UMGA account and create a 529 account with the proceeds – I thought that onec the funds were in the UGMA account – they belonged to the child (at maturity) and you could not convert them a 529 – am I wrong? Below is question and answer from online email message from magizine:

With the Kiddie Tax about to apply until age 24 for college students,
what advice are you giving parents who ask about realizing UGMA/UTMA
capital gains and establishing 529s with the assets? Is there a window
until 2008?

Edgar Parrish
Parrish Consulting Group at Merrill Lynch
Washington, D.C.

Edgar,

Yes. The current kiddie tax rules are still applicable for the rest of 2007, so assets held by children that were transferred from parents or grandparents can be sold this year and qualify for the lower capital gain rates. After this year, because of the increased age in the new law, these same children may get snared by the kiddie tax if they sell next year. One other alternative is to have the children hold the assets until they reach age 24.

Another alternative is for parents to fund Roth IRAs for children who are working. If children have earnings they can contribute to Roth IRAs and parents can give them the money to make those contributions. Roth IRA funds are very flexible since they can be withdrawn at any time for any reason tax- and penalty-free.