Beneficiary now has GI bill funding

KarenN 2020-03-08 21:42:05 UTC #1

Oldest son received UTMA in the form of stock from my mother before she died. This was before 529 accounts existed and it was intended for college. When he was almost 18, I realized it would be his free and clear at 18 and he was at that point not mature enough to handle that money and save it for college and he was entering the military. So I rolled most of it into a UTMA 529 account for him and left a small amount in the stock, which he then, as expected, sold once he was 18.

Fast forward, he's now almost 27, out of the military and has the GI benefits as well as some regular 529 account money my husband and i contributed to once those were a thing. He's Ok'd me changing the beneficiary on the regular 529 to his sister who is currently in college and could use the extra tuition help. But I would like him to have the UTMA money to spend on a car which he desperately needs, and maybe put some of it into a Roth IRA if possible. If he cashes this out, he will owe fed and state income taxes on the increase in value since I put it in there 9 years ago, right? Is there another penalty on top of that, for using it for non-education purposes?

Any other complications I'm not considering?

dcandmc 2020-03-09 17:15:37 UTC #2

You realize, don't you, that even though you rolled the UTMA assets into a 529 account before your son turned 18, he still gained access to that money when he reached the age of majority?

The earnings portion of any 529 distribution not used for qualified education expenses will be subject to income tax. It will also be subject to a 10% additional tax ("penalty") unless an exception applies. Receiving veterans' educational assistance is one of those exceptions, but unless your son is actually attending college and using the G.I. Bill benefit, it doesn't count. The penalty exception cannot be used if the 529 money is used to buy a car or fund a Roth IRA, simply because your son is eligible for the G.I. Bill.

KarenN 2020-03-10 03:21:09 UTC #3

Yes, of course I realized that he would have legal access to it at 18; but I was using the 529 constraints to reduce his desire to blow it all on non-educational things. He knew his grandmother had left him money for college and was content to leave it in the 529 once I did that but might have been more tempted by cash or the stocks to sell, without that barrier.

So as long as he is actually attending college and using his GI bill, it sounds like he could apply for the penalty exception. Part of the problem is that he doesn't currently have a working car, and can't attend classes without one. He's going to attend the local comm. college the first year, and has no transportation. But we may be able to work something out with me buying the car and then him paying me back once he's in school and can cash out some of the money.

The other idea I had was for him to transfer the money to his younger sister's 529 account and I would pay him the cash directly, avoiding both penalty and any income taxes.