You recently warned a parent not to let his son open a Roth IRA because it could keep him from getting financial aid for college. We opened an UTMA account for our niece some time ago, and wonder if that would reduce the amount of financial aid she could receive when she goes to college. - George and Toni, Illinois

An UTMA, or uniform transfer to minor account, can be extremely detrimental to families who need financial aid. UGMA, or uniform gift to minor accounts, are too.

If families think their income is low enough to qualify for financial aid, they should not open these accounts. If they already have an UGMA or UTMA, and know they will qualify for financial aid, they should consider getting rid of them before filling out aid forms.

Unfortunately, too many families blunder their way into these accounts, in which assets are transferred to a child via a trust typically known as a custodial account. They are similar, but UTMAs allow more types of assets to be transferred.

Well-intending relatives often go to brokers or financial advisers, express a desire to help a child in the family save for college, and are directed into an UGMA or an UTMA.

When financial advisers apply the same strategies to middle-income families that they apply to their high-income clients, people of modest means can pay a huge price when it comes time to pay for college.

For example, say a student is about to start his freshman year in college. Finances are tight for his family. His parents are going to face about $20,000 a year in college expenses. The college has calculated that the family will need financial aid, and to help, the college will give the family $2,500 in grants - free money that does not have to be repaid.

If the student had $10,000 in an UTMA account, however, the family could lose the entire $2,500 in grant assistance at some private colleges, and $2,000 at public ones, said Kalman A. Chany, a New York financial aid consultant and primary author of Paying for College Without Going Broke.

That's because of a quirky financial-aid formula that requires students to use 20 percent to 25 percent of any assets they have to pay for college.

The outcome would be very different if the same $10,000 in savings was held in a parent's account - under the parent's name - rather than in an account expressly devoted to the student.

Then, Chany said, the college formula would only require parents to use $560 a year, or 5.6 percent of the assets, to pay for college. And the family would receive $1,940 more in grant money than they would using the UTMA.

There's logic behind this: The idea is that students can use all the money they have for college, while parents have other needs to fund, too.

But the logic doesn't make much sense when parents are going to pay most of the college bill - regardless of the pot of money they tap.

It gets worse. All of this is based on a formula. And roughly speaking, the formula assumes that the family will remove only $2,500 a year in the UTMA to pay for college each year.

But if the parents are so strapped that they use the full $10,000 the first year, Chany says the college might still assume $2,500 is available for each of the next three years. So the family won't get grants that they otherwise might have received.

Keep in mind, however, that these concerns only apply to families who would qualify for grant assistance offered by colleges. Realize that most financial aid includes low-interest student loans, rather than grants.

gmarksjarvis@tribune.com

Gail MarksJarvis writes for Your Money. For more on managing your money, see her blog at www.chicagotribune.com/money.