Proceed with caution, warn certified financial planner professionals.

The advantages of college savings plans over custodial accounts -- either Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) depending on the state -- are many. Unlike custodial accounts, college savings plans allow the parents (or grandparents or other funders) to retain control of the assets, you can change beneficiaries, and the accounts may have less impact on student aid than custodial accounts because they are parental assets.

The tax advantages also are superior. While custodial accounts modestly reduce the tax bite on earnings, earnings in a 529 plan grow entirely free of tax and remain free of tax as long as the earnings are used for qualified education expenses. Some states also allow tax deductions for contributions made to in-state 529 plans.

The major advantages for custodial accounts are that the parent retains complete control over the investment choices and the account's funds can be used to benefit the child in areas other than college education, such as paying for orthodontia or music lessons. Also, when the child assumes control of the account at age 18 or 21 (depending on the state), there is no tax penalty if the child uses the money for something other than education expenses. 

But before converting your child's custodial account into a college savings plan, be aware of several potential problems.

Converting a custodial account into a 529 plan does not change ownership of the assets. Gifts made to a custodial account are irrevocable and your child remains the owner even when those assets are transferred to a 529 plan. In fact, the plans typically are referred to as 529 custodial accounts and the funds cannot be commingled with a regular 529 plan. That means that if the custodial child decides to not attend college, you don't have the option of changing account beneficiaries.

Furthermore, the child still takes control of the money at age of majority. If he or she chooses to spend the money on something other than college, that's their legal right; however, the earnings will then face a ten-percent penalty, plus ordinary income taxes.

You can't transfer the assets in a custodial account directly into a 529 custodial account. 529 accounts accept only cash, so you'll have to first sell stocks, bonds and other noncash assets in the custodial account and pay any taxes due on the gains. In addition, not all state plans accept custodial account conversions. If yours does not, you can join an out-of-state plan that does, but you would lose any state tax breaks.

You also gain little in the way of financial aid benefits should you convert. The custodial 529 account will be treated as a parental asset as would a regular 529 plan, but when the funds are actually distributed they are treated as student income, which counts more heavily against financial aid.

Does it ever make sense to convert? It may in limited situations, but you'll want to review the numbers with your financial planner. First, there's no point in converting the custodial account if you intended it for purposes other than college.

Conversion also tends to make less sense if the child is older because you probably won't benefit enough from the better tax breaks in the 529 to offset any substantial capital-gains taxes incurred from the conversion.

Also, consider other options before converting. The simplest is to stop funding the custodial account and start funding a regular college savings plan. This works especially well if the custodial account is small.

Another strategy is to spend the money from the custodial account on nonessential needs for the child. You're not allowed to spend the money on necessities such as clothing and food, but you can spend it on private school tuition, computers and so on. Then contribute that same amount, which you would otherwise have paid for out of household income, to a regular 529 plan.