UTMA Change of Ownership Effect on Compound Interest

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Kydough
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Joined: Sat May 26, 2018 7:46 pm

UTMA Change of Ownership Effect on Compound Interest

Post by Kydough » Sat May 26, 2018 8:05 pm

Hello I’m an extreme novice.

I’m wondering what the effects are of changing ownership of a UTMA Account into a non-retirement account has on the power of compound interest.

Given Facts of My Case:

2008 - Parents started UTMA Account with VTSAX, which has grown for 10 years from $40k to $80k.

2018 - The minor account is under my name now in a non-retirement account. The UTMA is $0 dollars now while my new non-retirement brokerage account is $80k. The historical timeline for my new non-retirement brokerage account only shows data from when the funds transferred making it look like I just bought $80k worth of shares last month.

Did I loose the power of compound interest from those years 10 years of growth and have to start back at year 0 or am I at year 11 now. Or am I extremely ignorant and this is not how compound interest works.

I plan on holding it for another 15 years. Would it look like I’ve been investing for only 15 years or 25 years?

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MP123
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by MP123 » Sat May 26, 2018 9:52 pm

Welcome!

It sounds like the account was just retitled from a UTMA account to being in your name.

That should have no effect on the performance of the assets in the account but now you have full control of it.

To answer your question you still have the 11 years of growth.

livesoft
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by livesoft » Sat May 26, 2018 10:07 pm

You ALWAYS owned the account and the assets in it. Your parent was the custodian. There has been no change of ownership.

The cost basis of the assets in the account are the same as before. Since the assets were purchased pre-2012 (except for shares purchased with dividends paid since the end of 2011), you probably have the cost basis method to be Average Cost per Share. You will have to learn about that.

It looks like you have been investing since 2008 because you have been investing since 2008.

Also be careful that you understand that there really was no "compound interest" going on here. This was not a savings account and was not invested in something that paid any interest. Instead, you have unrealized capital gains and dividends. They are a different thing when it comes to taxes which you will need to learn about, too.

Welcome to Adulthood.
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Kydough
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by Kydough » Sat May 26, 2018 11:20 pm

Thank you so so much. Sorry for being so ignorant. I’ll definitely need to do more research. Thanks for clarifying things for me and pointing me in the right direction!

Grt2bOutdoors
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by Grt2bOutdoors » Sat May 26, 2018 11:28 pm

Thank your parents, you are starting off from 1st base. Read a couple of the recommended books on wiki, you are on your way.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

dbr
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by dbr » Sun May 27, 2018 6:59 am

Kydough wrote:
Sat May 26, 2018 8:05 pm


Did I loose the power of compound interest from those years 10 years of growth and have to start back at year 0 or am I at year 11 now. Or am I extremely ignorant and this is not how compound interest works.

Of course you have not lost the compounding of return of the last ten years. You now have the benefits of that and continue to move ahead. It has nothing to do with what account the assets are in.

Note a previous poster is correct in noting that investment return is not interest in the sense you understand it, but investment return compounds. Compounding only means that the return in this year is applied to whatever has been accumulated at the beginning of the year, including all past returns.

livesoft
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by livesoft » Sun May 27, 2018 7:43 am

Kydough wrote:
Sat May 26, 2018 11:20 pm
Thank you so so much. Sorry for being so ignorant. I’ll definitely need to do more research. Thanks for clarifying things for me and pointing me in the right direction!
Welcome to the forum and absolutely no need to apologize. :) It is kind of amazing that you came to the right place to ask your question, so I'm impressed with that.

My kids had UTMA accounts and went through the same learning curve, so I have seen your situation up close and personal. This appears to be your first rodeo, so no worries.

I'll give you another something to learn about: If your taxable income is low enough, then you may wish to consider doing a little bit of something called "tax-gain harvesting." See: https://www.bogleheads.org/wiki/Tax_gain_harvesting You won't know if this is something you should do without a lot more knowledge, but you have the rest of your life to keep learning things. :)
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Kydough
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by Kydough » Sun May 27, 2018 9:48 am

Essentially, when it comes to my case, I’ve learned that it’s the magic of compound return that’s at work not compound interest, that the compounding power isn’t lost just because a change in account, to be mindful that capital gains and dividends are taxed as longterm if they are realized and depending on my current income there are different strategies I can take to negate taxes.

Wow, this is really such a great forum! This is my first ever forum post in the world of forums and would like to express how appreciative I am of you guys for taking to time to help me understand and better my financial knowledge! I’m excited to read more and possibly contribute to someone else’s question just like you guys have done for me so today :)

Kydough
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by Kydough » Sun May 27, 2018 10:29 am

Please scratch that comment about the magic of compounding returns/power of compounding. That’s not what’s going going on here. It’s more of the growth in price of VTSAX over time and reinvesting dividends and continually contributing to the account as the world economy continues to grow. I think...

dbr
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by dbr » Sun May 27, 2018 10:35 am

Kydough wrote:
Sun May 27, 2018 10:29 am
Please scratch that comment about the magic of compounding returns/power of compounding. That’s not what’s going going on here. It’s more of the growth in price of VTSAX over time and reinvesting dividends and continually contributing to the account as the world economy continues to grow. I think...
Compounding is a mathematical notion derived from the definition of return. As such it is just a description and isn't magic and doesn't have any power.

Your thought process is correct and compounding is how that is described mathematically. The magic, if there is any, arises from two factors:

1. Economic growth

2. Postponement of gratification

alex_686
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Re: UTMA Change of Ownership Effect on Compound Interest

Post by alex_686 » Sun May 27, 2018 10:40 am

Kydough wrote:
Sun May 27, 2018 10:29 am
Please scratch that comment about the magic of compounding returns/power of compounding.
Don't worry about that. Compounding returns is a bit of a oversimplification but it gets the gist of the message across. The next step would be to learn statistics, which is a bridge too far for most.

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