UTMA

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
loklav
Posts: 85
Joined: Fri Nov 10, 2017 11:39 pm

UTMA

Post by loklav » Fri Aug 10, 2018 1:04 pm

Hi all,

I just discovered the existence of the UTMA account and I'm trying to figure out how it works.
My daughter is going to College in 2 years (she is going to start her junior year). We are not US citizens (we have a green card), moved to the US 5 years ago and so we didn't know if she was going to attend College in the US or in our home country or... So that's one of the reason why we didn't want to invest in a 529 account.
So we just saved some money in a high yield saving account and in a regular brokerage account. And we are also planning to cash flow the remaining part.

Now I understand that having an UTMA account could be a better option since we would pay less taxes on the capital gains? We leave in California and are in the 25% tax bracket.
I also was reading that at some point (when?) people move the money from the UTMA account to a 529 account to not impact their financial aide eligibility? Am I correct?

Can someone point me at some document that explain how to use an UTMA account in this context?
Does it sounds like a good idea to stop investing in my saving account+brokerage account and instead to an UTMA account? Or may be do both?

Thanks

livesoft
Posts: 61944
Joined: Thu Mar 01, 2007 8:00 pm

Re: UTMA

Post by livesoft » Fri Aug 10, 2018 1:11 pm

We had UTMA accounts for our kids started and contributed to by their grandmother.

The tax savings were minuscule and probably not worth the hassle.

You will have to understand how US income taxes work and in particular something called the "Kiddie Tax." These things can be researched and are complicated. That is, any answers in this thread will only brush the surface.
Wiki This signature message sponsored by sscritic: Learn to fish.

Spirit Rider
Posts: 8371
Joined: Fri Mar 02, 2007 2:39 pm

Re: UTMA

Post by Spirit Rider » Fri Aug 10, 2018 4:44 pm

It is too late to accumulate earnings in a UTMA and move them to a 529 to avoid financial aid considerations. Starting with the 2017/18 school year FAFSA uses the prior prior year.

That means that the FAFSA for her 2020/21 college year will be based on 2018's income and assets. Any UTMA assets would be counter productive.

There is not much time for a 529 to accumulate tax-free earnings. However, if your state gives a tax deduction for 529 contributions that certainly makes sense.

loklav
Posts: 85
Joined: Fri Nov 10, 2017 11:39 pm

Re: UTMA

Post by loklav » Fri Aug 10, 2018 4:55 pm

Spirit Rider wrote:
Fri Aug 10, 2018 4:44 pm
It is too late to accumulate earnings in a UTMA and move them to a 529 to avoid financial aid considerations. Starting with the 2017/18 school year FAFSA uses the prior prior year.

That means that the FAFSA for her 2020/21 college year will be based on 2018's income and assets. Any UTMA assets would be counter productive.
This is what I guessed. But if I know that I won't be eligible to any financial aid (based on the MAGI), would it makes sense to use an UTMA to reduce the taxes on the gains? Can I keep it open through the college years and so contribute to and draw from it when needed?
There is not much time for a 529 to accumulate tax-free earnings. However, if your state gives a tax deduction for 529 contributions that certainly makes sense.
My state does not give any tax deduction for a 529. This is one of the other reasons that we did not use one

Grt2bOutdoors
Posts: 18849
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: UTMA

Post by Grt2bOutdoors » Fri Aug 10, 2018 5:12 pm

loklav wrote:
Fri Aug 10, 2018 4:55 pm
Spirit Rider wrote:
Fri Aug 10, 2018 4:44 pm
It is too late to accumulate earnings in a UTMA and move them to a 529 to avoid financial aid considerations. Starting with the 2017/18 school year FAFSA uses the prior prior year.

That means that the FAFSA for her 2020/21 college year will be based on 2018's income and assets. Any UTMA assets would be counter productive.
This is what I guessed. But if I know that I won't be eligible to any financial aid (based on the MAGI), would it makes sense to use an UTMA to reduce the taxes on the gains? Can I keep it open through the college years and so contribute to and draw from it when needed?
There is not much time for a 529 to accumulate tax-free earnings. However, if your state gives a tax deduction for 529 contributions that certainly makes sense.
My state does not give any tax deduction for a 529. This is one of the other reasons that we did not use one
Money deposited in an UTMA belongs to the child. It is considered to be a completed gift. If the child takes the money and goes to Paris, they can it’s theirs, no longer yours. How much in gains do you believe this account will generate in 2-3 years? Monies to be used for college soon, should be invested conservatively.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Spirit Rider
Posts: 8371
Joined: Fri Mar 02, 2007 2:39 pm

Re: UTMA

Post by Spirit Rider » Fri Aug 10, 2018 5:24 pm

If there is no financial aid in the picture a UTMA could help, but as livesoft pointed out you have to be aware of the kiddie tax rules.

Grt2beOutdoors makes an excellent point. Deposits to UTMA accounts are irrevocable completed gifts to the beneficiary. The account is owned by the beneficiary and must be used for the sole benefit of the beneficiary. At the age of termination (usually 18 or 21), they are entitled to full control of the assets to do with as they wish.

The other thing you could do if she has earned income is open a UTMA Roth IRA and deposit up to her earned income each year.

Post Reply