There are two ways to explore this rather tricky question. The first way is to examine whether it's possible to liquidate an UGMA/UTMA account and invest the proceeds in a 529 plan. The second way is to see whether it's possible to transfer existing UGMA/UTMA assets to a 529 plan.

Before looking at these two questions, it's helpful to know some basics about UGMA/UTMA (which, by the way, stands for Uniform Gifts (Transfers) to Minors Act) accounts. All gifts to an UGMA/UTMA account are considered irrevocable gifts to the child named as the beneficiary of the account. Once a gift is made, the custodian (usually the parent) can withdraw funds only if the money is used for the child's benefit. This may include things like private elementary or secondary school, summer camp, a computer, violin lessons, a secondhand car, and so on.

This requirement that the money must be used for the child's benefit also includes making an investment in a 529 plan (college savings plan or prepaid tuition plan), as long as the 529 plan is established for the same beneficiary as the custodial account. You can liquidate the investments in the UGMA/UTMA account and invest all of the proceeds in a 529 plan (though you may incur tax liability). The key is that the proceeds must be used for the benefit of the same beneficiary. So, you wouldn't be able to invest the UGMA/UTMA proceeds in a 529 plan established for a different beneficiary.

The question of keeping your child's UGMA/UTMA account intact and transferring the assets to a 529 plan is more difficult. Whether this is allowed usually depends on the rules of the 529 plan. In either case--liquidating the UGMA/UTMA account or transferring the assets in the UGMA/UTMA account--there are important things to keep in mind.

First, federal law requires that all contributions to 529 plans be made in cash. Therefore, all assets in an UGMA/UTMA account would first need to be converted to cash if they were not already (e.g., stocks, real estate, certificates of deposit). So, even if the 529 plan accepts the transfer of assets, you will be required to turn those assets into cash. Keep in mind that this may trigger income tax liability.

Second, because the cash will now be held within the UGMA/UTMA account, which, in turn, is in the 529 plan (sort of a cup within a bucket), you are still bound by the rules of UGMA/UTMA accounts. This means that you can't change the beneficiary of the 529 plan, because gifts to an UGMA/UTMA account are considered irrevocable gifts to the beneficiary. In addition, you must relinquish control of the 529 plan to your child when he or she reaches the age of majority (18 or 21, depending on state law), because this is what happens with an UGMA/UTMA account. And finally, all future contributions you make to the 529 plan will be treated as UGMA/UTMA contributions, meaning that they will be considered irrevocable gifts to the beneficiary. Third, some 529 plans might require that you name the child as the owner (as well as the beneficiary) of the 529 plan after UGMA/UTMA funds are contributed.