529 PLANS VS. UGMA ACCOUNTS - WHICH IS A BETTER INVESTMENT VEHICLE? Physician Asset Advisor, October 2004 Over the past few years, the popularity of 529 Plans has grown exponentially. Touted as a tax-free way to save for college, almost every state in the union now offers a 529 savings plan. Let’s compare these with UGMA (Uniform Gift to Minors Act) accounts. 529 Plans Proponents feel there are two main advantages of the 529 Plans - 1) Individuals are forced to save for secondary education. 2) One’s overall tax liability is reduced by allowing tax-free buildup and withdrawals for educational purposes. The disadvantage of 529 plans is that if the money is not used for education, it is fully taxable plus subject to a 10% penalty. The other problem is that the few investment options available vary state by state. In addition, built-in loads, commissions and expenses can reduce the returns. Usually, the plan sponsor and not the individual make the investment decisions. UGMA Accounts These accounts allow parents to give each child up to $22,000 per year, free of any gift tax. Advantages of UGMA accounts include - 1) Unlimited investment flexibility in any combination of mutual funds, stocks, bonds, or real estate 2) Lower fees and expenses than a 529 plan. Certain investments would actually have zero expenses such as individual bonds or stocks. 3) Higher returns would be anticipated in a well-managed UGMA account. We have found that most physicians pay for their children’s college years out of cash flow, not from long-term savings for education. Due to higher potential returns, UGMA accounts should accumulate more after-tax money for education or other needs. This allows UGMA funds, which are after-tax, to be spent by the child for their wedding or a new home down payment. The only downside to UGMA accounts is children’s ability to take ownership of funds at age 18 to 21. Therefore, caution should be exercised with offspring who seem financially irresponsible. Example A doctor and spouse contribute $22,000 per year for 5 years for a newborn. The 529 plan earns 6% per year, and the UGMA account earns 8% per year due to lower expenses and better investment selection. The UGMA account is taxed at an average tax rate of 7%. (Children, especially after age 14, are in a much lower tax bracket than adults.) By age 18, the 529 plan is worth $280,000 and the UGMA account is worth $348,000 (after-tax). The UGMA after-tax funds can be directed towards any expenditure. The 529 plan must be used for education or the physician will owe significant taxes and penalties. Conclusion We have found that the flexibility of UGMA accounts usually makes them a better investment choice than 529 plans. A 529 plan may be advantageous in situations where the physician needs a forced savings program for college education plans. Upcoming Seminars Sponsored by the BCMA IS GOING BARE WORKING? Case Histories Westside Hospital Thursday, Oct. 14th @ 6:00 p.m. University Hospital Tuesday, Oct. 19th @ 6:00 p.m. Singer Xenos is an established wealth management firm specializing in physicians with $500,000-plus in investments. We manage over $450 million in assets such as retirement plans, annuities and personal accounts, with an emphasis on wealth building and protection from malpractice claims. Both Worth Magazine and Medical Economics named Singer Xenos one of the Top Financial Advisors nationally for physicians. Singer Xenos does not provide legal advice. Please consult with your own legal counsel.