A father named Josh called The Ramsey Show recently with a problem most parents would envy: He and his wife had just paid off $100,000 in debt and were now saving $250 per month for each of their two sons, ages 4 and 6. The money was sitting in a Uniform Transfers to Minors Act (UTMA) account. But Josh is already worried about how his kids will spend the money. “I realized that one day they’re going to wake up at 18, at that rate with $60,000 and I just hand them the keys,” he said.
Host Jade Warshaw agreed there’s reason for concern. “I shy back from the idea of giving a large sum of money to an 18-year-old, especially when at that point, yeah, they’re on their own,” she said. “The money is now in their name and you can’t really govern it the way you’d like to.”
The UTMA Problem: You Lose the Keys at 18
A UTMA account is easy to open and flexible in what it can hold, but it has one structural flaw: the account legally transfers to the child at age 18 or 21, depending on the state. At that point, the parent has no legal authority over how the money is spent. There are no restrictions, no oversight, and no recourse if the teenager uses it to buy a motorcycle instead of paying tuition.
“Do I put it in a 529?” Josh asked. “They might not go to school. Do I put it in a mutual fund in my name and then we can have a conversation?”
Warshaw replied: “I would be partial to throwing it in a 529 account instead, especially at the rate that you’re investing. I don’t think that you’re going to overfund.” A 529 plan keeps the parent as the account owner. The money grows tax-free when used for qualified education expenses, and the parent retains control indefinitely.
The concern most parents raise about 529s is the “what if they don’t go to college” scenario. Warshaw addressed this: “If they want some form of certificate, if they want to do something in the trades, I think that’s a good sum of money. And you’ve got to remember that it is transferable.”
529 accounts can be used for trade programs, apprenticeships, and certificate courses, not just four-year universities. Co-host Ken Coleman added that this flexibility is important. “I can’t even imagine what higher education looks like in 12 to 14 years,” he said. “I’m not kidding you. So I think it’s going to be radically different.”
An Escape Valve If Kids Skip Higher Ed
Warshaw reminded the caller that unused 529 funds can be converted tax-free to Roth IRAs for the recipients, under certain circumstances. She explained the mechanics: “The 529, it needs to have been in existence for the current beneficiary for at least 15 years. You can move those monies to a Roth IRA. There’s a $35,000 lifetime limit.”
For Josh’s sons, who are currently 4 and 6, a 529 opened today would easily satisfy the 15-year requirement before they reach adulthood. If neither child pursues higher education, up to $35,000 per beneficiary can eventually roll into a Roth IRA, giving them a tax-advantaged retirement head start. So an untapped 529, “it’s not like forever lost,” Warshaw said.
If funds are pulled out for non-education, non-rollover purposes, there’s a real penalty: 10% on earnings plus ordinary income tax.
The Hybrid Strategy for Parents Who Want More Flexibility
Warshaw offered another option: “I think you can get creative and say, okay, I’m going to put half of this in a 529 and I’m going to put half of it in a mutual fund in me and my wife’s name. And then you have a bit more control over it, but then you’re getting some of the tax advantages of the 529.”
In this scenario, the parents stay in control of both pools entirely. The child gets access to nothing automatically at 18. And Josh has peace of mind in knowing that he’ll have some control over how the money is used.
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