There’s no doubt that desperate times often call for desperate measures, and for many households, times are getting desperate. Many parents are wrestling with whether or not they can tap their kids’ college accounts to help make ends meet with prices rising everywhere from the gas pump to the checkout line. Every account is slightly different when it comes to the rules and penalties for withdrawing college funds for non-college expenses. UGMA and ULTA accounts allow adults to make a financial gift to a minor, and also name someone (including themselves) as the custodian of the account. The important word here is “gift.” The money in these accounts, once given, is the legal property of the minor. The custodian’s job is to keep it safe and invest it wisely, so that the minor could benefit from it someday.  UGMA and UTMA accounts are often used to pay for college, but can also be used for any expense the minor incurs while that sounds strict, the rules define “benefit” fairly liberally. This can include anything from basics costs of living to leisure activities like teams sports. You just have to be able to prove that the minor directly benefited from the use of the money.

Withdrawal rules for different accounts in colleges

Any profits made on the liquidation of investments in a child’s UGMA or UTMA account are reported on the child’s tax return. Depending on how the family files their tax returns, some or all of this might be included on the parent’s tax return, at the parent’s tax rate. There are no IRS penalties on taking money out of a UGMA or UTMA account. However, it is possible that the investments purchased may have a surrender charge or exit fee if held less than a certain amount of time. Someone who has contributed to a Section 529 account can choose to access their money for any reason at any time. They do not have to be for the benefit of the child and not have to worry about explaining it to anyone. Money that is withdrawn from a Section 529 plan that is not used for higher education expenses will be subject to a 10% penalty and income tax on the profits. For example you’d have a $5,000 profit in case you put $10,000 into a Section 529 plan that is now worth $15,000. You’d have to pay income tax and a 10% penalty on the $5,000 gain in case that entire amount is withdrawn for non-college purposes. The underlying investment may charge you a surrender fee in addition to this. You’ll likely get hit with a surrender penalty in case you were sold a Section 529 Plan by a full-service stockbroker and you have “B” or “C” class mutual fund shares.  You can use it for other educational costs before college while you can’t use it for food or clothing like you can with some of the two accounts. These costs can include K-12 private school tuition, tutoring, books, school uniforms, and technology (a computer or laptop).