529 vs. placing appreciated securities into a UTMA account

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
ipo_fin_z
Posts: 24
Joined: Tue Jan 30, 2018 10:28 am

529 vs. placing appreciated securities into a UTMA account

Post by ipo_fin_z » Thu Aug 09, 2018 2:58 pm

I currently have a highly concentrated stock position (with capital gains ~ 50% of value) that I'm going to partially offload this and next year for diversification reasons. I reside in CA.

This raises questions of how to save for college for my 2 year old.

My first question: What is CA's tax rate for income in a UTMA? In the past, this would be parent's marginal tax rate, but are they now going to use the trust rules like the federal government? I'm assuming they are using the trust rules now (which is the single taxpayer bracket), but please correct me if wrong!

More analysis:

From a 2017 point of view, dumping proceeds and superfunding a 529 account seemed like a win, but with the new tax code, there's a considerable reduction in taxes on income in trusts. (federally, ltcg are 0% up to $4700/year and 15% for the next $8kish, rather than the old code of 0% for first $2k and parent's tax rate above that!).
I could dump something like $18k of securities into the account over 2 years (saving myself $4k or so of taxes), selling immediately and switching to an index fund, and then watch it grow. As long as yearly tax gain harvesting is done, that can grow to $50kish (6% rate of return) and never incur any cap gains. Needless to say, that's about 1 year at University of California.

Additionally, while I need to do the math, it seems covering the other few years with a UTMA is still better than a 529. Transferring stock from me to the kid drops tax rate on next $10k of gains from 37% to 16%, saving 10% of the overall value. 10% savings now seems like a roughly neutral trade with having to pay capital gains on the returns in 20 years (16% tax rate). -- and an obvious win when you consider the risk of overfunding the 529. (And now with around $40k injected.. 3 years of college is covered)

Final questions:
1. Am I understanding the federal tax rates correctly?
2. Am I understanding the California tax rates correctly?
3. Does this strategy work? Am I missing some major advantage of the 529 or downside of UTMA?

zrail
Posts: 11
Joined: Sun Jan 28, 2018 9:18 am

Re: 529 vs. placing appreciated securities into a UTMA account

Post by zrail » Thu Aug 09, 2018 3:24 pm

I don't know how CA laws are going to change (I don't think many states have publicly contemplated how TCJA affects their own tax forms yet), but I will say that this is exactly how I'm handling my daughters' college savings. My plan is to dump appreciated shares into their UTMAs every year and tax gain harvest up to the top of the 0% bracket. When they're actually in college we'll probably slush some income through a 529 to get the state tax deduction but it's not going to accumulate there.

ipo_fin_z
Posts: 24
Joined: Tue Jan 30, 2018 10:28 am

Re: 529 vs. placing appreciated securities into a UTMA account

Post by ipo_fin_z » Thu Aug 09, 2018 4:54 pm

Alright, here's CA's laws: https://www.ftb.ca.gov/law/legis/Federa ... s/2017.pdf
Tax on Unearned Income of Children
California conforms, under the PITL, to IRC section 1(g), relating to the tax on unearned income of
children (kiddie tax), as of the “specified date” of January 1, 2015,59 with modifications, but does
not conform to the federal simplification of the kiddie tax.
Looks like they are going to keep the rule using parent's marginal rate above $2100.

mega317
Posts: 2554
Joined: Tue Apr 19, 2016 10:55 am

Re: 529 vs. placing appreciated securities into a UTMA account

Post by mega317 » Thu Aug 09, 2018 4:59 pm

that can grow to $50kish (6% rate of return) and never incur any cap gains. Needless to say, that's about 1 year at University of California.
UC's in-state estimated cost of attendance is 35k on campus, almost half for room and board. If you live near a campus make them commute and you have 7 semesters covered!

Going back to the start of your post, how much of your portfolio is this stock? I would be nervous about waiting even one day to sell a concentrated position if it was very large.
ipo_fin_z wrote:
Thu Aug 09, 2018 4:54 pm
Looks like they are going to keep the rule using parent's marginal rate above $2100.
Thanks for finding that.

ipo_fin_z
Posts: 24
Joined: Tue Jan 30, 2018 10:28 am

Re: 529 vs. placing appreciated securities into a UTMA account

Post by ipo_fin_z » Thu Aug 09, 2018 5:16 pm

post error - can't delete
Last edited by ipo_fin_z on Thu Aug 09, 2018 5:18 pm, edited 1 time in total.

ipo_fin_z
Posts: 24
Joined: Tue Jan 30, 2018 10:28 am

Re: 529 vs. placing appreciated securities into a UTMA account

Post by ipo_fin_z » Thu Aug 09, 2018 5:17 pm

post error - can't delete
Last edited by ipo_fin_z on Thu Aug 09, 2018 5:18 pm, edited 1 time in total.

ipo_fin_z
Posts: 24
Joined: Tue Jan 30, 2018 10:28 am

Re: 529 vs. placing appreciated securities into a UTMA account

Post by ipo_fin_z » Thu Aug 09, 2018 5:17 pm

mega317 wrote:
Thu Aug 09, 2018 4:59 pm
UC's in-state estimated cost of attendance is 35k on campus, almost half for room and board. If you live near a campus make them commute and you have 7 semesters covered!
I used $50k assuming 2% education inflation above inflation rates (so ~4% which is historical).
Yup, commuting saves a lot - this is why 529s are so dang annoying to plan.
mega317 wrote:
Thu Aug 09, 2018 4:59 pm
Going back to the start of your post, how much of your portfolio is this stock? I would be nervous about waiting even one day to sell a concentrated position if it was very large.
80%; it's terrifying. Under IPO lock-up, so trying to figure out what to do once lock-up ends. There are tax reasons to hold on to a substantial minority of the position next year.. actually explored in my first post here
mega317 wrote:
Thu Aug 09, 2018 4:59 pm
ipo_fin_z wrote:
Thu Aug 09, 2018 4:54 pm
Looks like they are going to keep the rule using parent's marginal rate above $2100.
Thanks for finding that.
Yah, an interesting question is whether using a trust can beat out a UTMA due to CA tax savings. (I imagine the management cost might be too high though)

mega317
Posts: 2554
Joined: Tue Apr 19, 2016 10:55 am

Re: 529 vs. placing appreciated securities into a UTMA account

Post by mega317 » Thu Aug 09, 2018 7:40 pm

I didn't read your other thread, but if any more than about 10% of my money was in a single stock, I would give strong consideration to selling it all at the first opportunity regardless of tax cost.

Post Reply