Help with college age sons Roth IRA options...

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ndnboy
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Help with college age sons Roth IRA options...

Post by ndnboy » Thu Oct 18, 2018 10:36 am

We have a funded 529 for our sons education and he also has a UGMA at TRowe we opened when he was young. I would like him to consider opening up a Roth IRA and get into good saving habits now moving forward.

For convenience I would like to stay with our BOA / Merrill Edge since we all have current BOA acts (we also have the Premium Merrill Act). What would be good choices for him for a Roth IRA? Mutual funds or ETFs, not sure of low cost funds at Merrill, we have done ETFs but with whole share pricing, unsure if that will be best for him. We anticipate he would be depositing at most approximately $500 annually from his part time job ($5-6K yr).

His current AA is:

UGMA at Trowe $23K
Savings at BOA $2K
529 at Trowe $90K

Thx

KlangFool
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Re: Help with college age sons Roth IRA options...

Post by KlangFool » Thu Oct 18, 2018 10:48 am

OP,

To avoid transaction cost, I would suggest that you avoid ETF and go with Vanguard mutual fund. Start a Vanguard Roth IRA and invest in Vanguard Lifestrategy Growth Fund.

https://investor.vanguard.com/mutual-fu ... file/VASGX

KlangFool

JonSharpe
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Re: Help with college age sons Roth IRA options...

Post by JonSharpe » Thu Oct 18, 2018 10:53 am

I just opened up a Roth IRA for my daughter who just started college. The main advice I can offer is that you can only deposit up to the amount the child earns in a given year. For her, it will probably be about $500 like yourself.

I'm going to encourage her to invest it in a low-cost total market index ETF at Vanguard which is where I have my accounts. The goal is to get her into the habit of saving each year for retirement and I think the total market ETF is a good bet for the long term.

Hope that's helpful.

KlangFool - I don't believe there is a transaction cost for Vanguard ETF's if you have a Vanguard account. Also, the mutual funds have minimums that may be problematic in this case.

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Alexa9
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Re: Help with college age sons Roth IRA options...

Post by Alexa9 » Thu Oct 18, 2018 10:54 am

ETFs: VTI, VXUS, BND (Three Fund Portfolio) or Target Date / Lifestrategy Fund

I would skip the middleman and go straight to Vanguard though.

KlangFool
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Re: Help with college age sons Roth IRA options...

Post by KlangFool » Thu Oct 18, 2018 11:00 am

JonSharpe wrote:
Thu Oct 18, 2018 10:53 am
I just opened up a Roth IRA for my daughter who just started college. The main advice I can offer is that you can only deposit up to the amount the child earns in a given year. For her, it will probably be about $500 like yourself.

I'm going to encourage her to invest it in a low-cost total market index ETF at Vanguard which is where I have my accounts. The goal is to get her into the habit of saving each year for retirement and I think the total market ETF is a good bet for the long term.

Hope that's helpful.

KlangFool - I don't believe there is a transaction cost for Vanguard ETF's if you have a Vanguard account. Also, the mutual funds have minimums that may be problematic in this case.
JonSharpe,

1) I do not want my children to get into the habit of 100% stock.

2) It is not a given that my children can rebalance.

3) I start my kids with the Star fund that has a minimum balance of $1,000. The life strategy growth fund starts at $3,000.

<<I think the total market ETF is a good bet for the long term.>>

4) I don't. And, if you do that, it cannot be used as an emergency fund.

KlangFool

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Thu Oct 18, 2018 11:00 am

Thanks for the replies so far.

With Merrill Edge we currently dont pay ETF fees but with his low opening balance Im sure he would. Ive seen numerous post on 'just go to Vanguard to buy their funds' vs purchasing at another broker. I guess I would like to know if anyone has found success with doing it through Merrill, for the convenience of his already opened savings act....

I was hoping to minimize the monthly statements from increasing (already have Trowe and Merrill coming in) but I guess he will be getting his own statement anyway, from wherever.

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celia
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Re: Help with college age sons Roth IRA options...

Post by celia » Thu Oct 18, 2018 11:06 am

ndnboy wrote:
Thu Oct 18, 2018 10:36 am
We anticipate he would be depositing at most approximately $500 annually from his part time job ($5-6K yr).
Why don't you "match" his contribution for a few years, as long as he makes more than the total contribution? Then he will reach the minimum to get into a fund much faster.

harvestbook
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Re: Help with college age sons Roth IRA options...

Post by harvestbook » Thu Oct 18, 2018 11:08 am

I started my college-aged daughter's Roth with Target Date 2060, minimum of $1,000. When it got large enough to meet fund minimums, I split it into Total Stock Market and Emerging Markets. Yeah that looks dumb now but I'll let it stick there. I should've just gone Total Stock and Total International and left it alone, for simplicity and ease of understanding. I don't believe in bonds for an 18-year-old, but obviously I'm dumb!
I'm not smart enough to know, and I can't afford to guess.

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Thu Oct 18, 2018 11:10 am

celia wrote:
Thu Oct 18, 2018 11:06 am
ndnboy wrote:
Thu Oct 18, 2018 10:36 am
We anticipate he would be depositing at most approximately $500 annually from his part time job ($5-6K yr).
Why don't you "match" his contribution for a few years, as long as he makes more than the total contribution? Then he will reach the minimum to get into a fund much faster.
Thx, I didnt mention it earlier but we do hope to match his contributions moving forward to motivate the savings, also plan on Bday/Xmas deposits vs the new Playstation etc : )

Any issues with min deposit can be helped with his UGMA if needed too.

Jack FFR1846
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Re: Help with college age sons Roth IRA options...

Post by Jack FFR1846 » Thu Oct 18, 2018 11:50 am

Schwab, TDAmeritrade and Fidelity have very low minimums ($0) and lots of ETF offerings. I got my older son started the first year he had earned income with a Roth at TDAmeritrade with $151, which bought 1 share of VTI at the time. Vanguard ETFs are no longer free at TDA. This past summer, he started a brokerage account at Schwab and has put a couple thousand dollars into SCHB and accidentally bought one share of Cypris, which taught him to look at costs of commissions.

Do you get statements in paper? Why would you do that. I get them electronically and only get them when needed. Between DW and I, we have 10 accounts at 4 brokerages and I never look at statements.
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StealthRabbit
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Re: Help with college age sons Roth IRA options...

Post by StealthRabbit » Thu Oct 18, 2018 3:56 pm

On Topic: (IRA is a GREAT place to stash student cash / equity! (FAFSA does not touch it).

Our kids did all 3 in their Roths... MF, ETF, individual stocks (I matched their earned income (into Roth) 100% from age 12 - age 18 ~ $20k by age 18)

They learned a lot from the experience of systematic contributions, managing funds, saving in Roth.
Guided the career of one (now 12 yrs beyond college).

BigMoneyNoWhammies
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Re: Help with college age sons Roth IRA options...

Post by BigMoneyNoWhammies » Thu Oct 18, 2018 4:29 pm

ndnboy wrote:
Thu Oct 18, 2018 10:36 am
We have a funded 529 for our sons education and he also has a UGMA at TRowe we opened when he was young. I would like him to consider opening up a Roth IRA and get into good saving habits now moving forward.

For convenience I would like to stay with our BOA / Merrill Edge since we all have current BOA acts (we also have the Premium Merrill Act). What would be good choices for him for a Roth IRA? Mutual funds or ETFs, not sure of low cost funds at Merrill, we have done ETFs but with whole share pricing, unsure if that will be best for him. We anticipate he would be depositing at most approximately $500 annually from his part time job ($5-6K yr).

His current AA is:

UGMA at Trowe $23K
Savings at BOA $2K
529 at Trowe $90K

Thx
I had my Roth IRA started for me by my parents while I was in college @ Etrade. They now have hundreds of no load and no transaction fee ETFs and mutual funds, including many low expense ratio Ishares and Vanguard funds that would be appropriate for a beginning investor like VTI and ITOT (the Vanguard and Ishares total US market ETFs, respectively). Etrade generally has slightly higher transaction costs than other platforms, but if you're sticking to the type of investing generally advocated on this forum you won't ever have a need to pay a transaction fee. I've never had an issue with their platform or with customer service.

LateStarter1975
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Re: Help with college age sons Roth IRA options...

Post by LateStarter1975 » Thu Oct 18, 2018 4:55 pm

JonSharpe wrote:
Thu Oct 18, 2018 10:53 am
I just opened up a Roth IRA for my daughter who just started college. The main advice I can offer is that you can only deposit up to the amount the child earns in a given year. For her, it will probably be about $500 like yourself.

I'm going to encourage her to invest it in a low-cost total market index ETF at Vanguard which is where I have my accounts. The goal is to get her into the habit of saving each year for retirement and I think the total market ETF is a good bet for the long term.

Hope that's helpful.

KlangFool - I don't believe there is a transaction cost for Vanguard ETF's if you have a Vanguard account. Also, the mutual funds have minimums that may be problematic in this case.
Just to ask you about this. A family friend's son has asked me about helping him to open a Roth IRA to invest the income he made from summer job this year. Does opening a Roth IRA for a minor (he is 14) with Vanguard require the parent to be a custodian to the account? How does that process work? Thanks
Debt is dangerous...simple is beautiful

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celia
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Re: Help with college age sons Roth IRA options...

Post by celia » Thu Oct 18, 2018 7:53 pm

LateStarter1975 wrote:
Thu Oct 18, 2018 4:55 pm
Just to ask you about this. A family friend's son has asked me about helping him to open a Roth IRA to invest the income he made from summer job this year. Does opening a Roth IRA for a minor (he is 14) with Vanguard require the parent to be a custodian to the account? How does that process work?
In my opinion, you should always get the parents' permission first. Possible drawbacks:
* You could be seen as interfering in their family finances. You likely don't know if the Roth interferes with anything.
* The parent (or another relative) is already contributing to a Roth for him and the total contributions could become more than he earns.
* The minor (as an adult) might be tempted to spend it one year and incur an early withdrawal penalty. The value of the Roth is spent but someone needs to pay the taxes/penalty. If he is still their dependent, this may impact the parents' taxes.
* The parent needs to receive the statements. What happens if one of you moves and your families lose contact with each other?
* The parents might want the minor to spend the money on something they want him to have but they can't/won't buy it for him.
* $500 might seem more like a "nuisance account" for them. It could also attract other junk mail.
* If you help on the paperwork, you will likely see his SSN and yours might be seen by them.

This might also be an opportunity to make the parents more aware of their own savings habits without saying anything about them. Be sure you let them know you don't want to interfere but that you are willing to "mentor" their son in long-term planning if it is ok with them. Ask THEM who they want to be the custodian and the address to use.

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Fri Oct 19, 2018 3:54 am

Alot of great information, will be looking into best low cost, low min option.

Any thoughts on Etrade and VTSMX ? No min for a Roth IRA and its a NTF fund, so it keeps future purchase cheap.

Thx again

LateStarter1975
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Re: Help with college age sons Roth IRA options...

Post by LateStarter1975 » Fri Oct 19, 2018 8:10 am

celia wrote:
Thu Oct 18, 2018 7:53 pm
LateStarter1975 wrote:
Thu Oct 18, 2018 4:55 pm
Just to ask you about this. A family friend's son has asked me about helping him to open a Roth IRA to invest the income he made from summer job this year. Does opening a Roth IRA for a minor (he is 14) with Vanguard require the parent to be a custodian to the account? How does that process work?
In my opinion, you should always get the parents' permission first. Possible drawbacks:
* You could be seen as interfering in their family finances. You likely don't know if the Roth interferes with anything.
* The parent (or another relative) is already contributing to a Roth for him and the total contributions could become more than he earns.
* The minor (as an adult) might be tempted to spend it one year and incur an early withdrawal penalty. The value of the Roth is spent but someone needs to pay the taxes/penalty. If he is still their dependent, this may impact the parents' taxes.
* The parent needs to receive the statements. What happens if one of you moves and your families lose contact with each other?
* The parents might want the minor to spend the money on something they want him to have but they can't/won't buy it for him.
* $500 might seem more like a "nuisance account" for them. It could also attract other junk mail.
* If you help on the paperwork, you will likely see his SSN and yours might be seen by them.

This might also be an opportunity to make the parents more aware of their own savings habits without saying anything about them. Be sure you let them know you don't want to interfere but that you are willing to "mentor" their son in long-term planning if it is ok with them. Ask THEM who they want to be the custodian and the address to use.
Thank you Celia. Very salient points.
* The parents already know about this. I had talked to their son about the effect of compound interest, after he got his very paycheck and he was very excited and he came back to ask me how to open a Roth IRA account so he can put the money there
* I always defer to the parents and have encouraged them to match his paycheck and start a Roth IRA account for him
* Parents have no knowledge about stock market investing and despite my gentle prodding over the years, have yet to open Roth accounts. They invest heavily in real estate though
*If I help them set up the Roth account for their son, I can never be the custodian, if needed. One of the parents will have to fill that role and I will explain the rules of the Roth IRA about withdrawals
*I can encourage the parents to sign up for e-statements instead of paper statements
* The parents already provide for everything for this child. I have encouraged the child to save some of his money, give some and spend the rest. He insists he doesn't really have any need to spend on
*While I'm not exactly sure of how much he made this past summer, it's not so much about the amount. I was able to convince him that money compounded over decades will yield a lot of extra money. I used the Benjamin Franklin example with the money he gave to the cities of Boston and Philadelphia and the boy's mind was blown
* While I may help them set up an online account for a Roth IRA, I cannot be the custodian, if needed (the parent will have to fill that role) and will not see his SSN and will not let them see mine either
The parents already told me to help him set this up, but I'm trying to have as much buy in from the parents as possible before I do it
Debt is dangerous...simple is beautiful

JonSharpe
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Re: Help with college age sons Roth IRA options...

Post by JonSharpe » Tue Oct 30, 2018 7:47 am

LateStarter1975 wrote:
Thu Oct 18, 2018 4:55 pm
JonSharpe wrote:
Thu Oct 18, 2018 10:53 am
I just opened up a Roth IRA for my daughter who just started college. The main advice I can offer is that you can only deposit up to the amount the child earns in a given year. For her, it will probably be about $500 like yourself.

I'm going to encourage her to invest it in a low-cost total market index ETF at Vanguard which is where I have my accounts. The goal is to get her into the habit of saving each year for retirement and I think the total market ETF is a good bet for the long term.

Hope that's helpful.

KlangFool - I don't believe there is a transaction cost for Vanguard ETF's if you have a Vanguard account. Also, the mutual funds have minimums that may be problematic in this case.
Just to ask you about this. A family friend's son has asked me about helping him to open a Roth IRA to invest the income he made from summer job this year. Does opening a Roth IRA for a minor (he is 14) with Vanguard require the parent to be a custodian to the account? How does that process work? Thanks
My daughter was 18 when she opened her account so hers was a normal Roth. I'm planning on opening one for my son at Vanguard, he is 16. My understanding is that yes, it will be a custodial account, but I have not opened it yet.

Spirit Rider
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Re: Help with college age sons Roth IRA options...

Post by Spirit Rider » Tue Oct 30, 2018 8:11 am

ndnboy wrote:
Thu Oct 18, 2018 10:36 am
His current AA is:

UGMA at Trowe $23K
Savings at BOA $2K
529 at Trowe $90K
This is not an asset allocation, but rather just account locations.

You should consider distributing enough UGMA funds such that when combined with his contributions/your matching he has maximized the lesser of his earnings/IRA contribution limit.

This can be up to ($4700 - current UGMA income) in LTCG/QDIV without any additional taxes.

Roth IRA contributions can be withdrawn at anytime. However, when he reaches the age of UGMA termination. He might be less likely to raid a Roth IRA and in the meantime his earnings will be tax-free if they remain in the Roth IRA.

Even if you do not go this route, you should be tax-gain harvesting the UGMA up to the tax-free limit.

rkhusky
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Re: Help with college age sons Roth IRA options...

Post by rkhusky » Tue Oct 30, 2018 8:25 am

Just go with Vanguard Target Retirement 2060 (or 2055 or 2065). Encourage him to pony up the $1K minimum. Then just contribute. Vanguard will handle all rebalancing and account maintenance.
Last edited by rkhusky on Tue Oct 30, 2018 8:28 am, edited 1 time in total.

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Tue Oct 30, 2018 8:28 am

Spirit Rider wrote:
Tue Oct 30, 2018 8:11 am
ndnboy wrote:
Thu Oct 18, 2018 10:36 am
His current AA is:

UGMA at Trowe $23K
Savings at BOA $2K
529 at Trowe $90K
This is not an asset allocation, but rather just account locations.

You should consider distributing enough UGMA funds such that when combined with his contributions/your matching he has maximized the lesser of his earnings/IRA contribution limit.

This can be up to ($4700 - current UGMA income) in LTCG/QDIV without any additional taxes.

Roth IRA contributions can be withdrawn at anytime. However, when he reaches the age of UGMA termination. He might be less likely to raid a Roth IRA and in the meantime his earnings will be tax-free if they remain in the Roth IRA.

Even if you do not go this route, you should be tax-gain harvesting the UGMA up to the tax-free limit.
Thanks, I had thought to follow up with that question.

So sell enough of the UGMA annually to meet his max of earnings or IRA limit. He has $14K in covered/non cov LTCG, so he wouldnt be Paying the taxes on gains now and maxing out his tax free withdrawals down the road???

Spirit Rider
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Re: Help with college age sons Roth IRA options...

Post by Spirit Rider » Tue Oct 30, 2018 8:51 am

As long as the total unearned income is <= $4700, his LTCG tax rate will be 0%. Just be sure to factor any amounts of unearned income that already will be received. E.g. Interest, dividends and mutual fund distributions.

PFInterest
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Re: Help with college age sons Roth IRA options...

Post by PFInterest » Tue Oct 30, 2018 8:53 am

Is the utma not theirs already?
You can consider matching his contribution.

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Tue Oct 30, 2018 9:00 am

PFInterest wrote:
Tue Oct 30, 2018 8:53 am
Is the utma not theirs already?
You can consider matching his contribution.

We plan to match his annual investment, like the idea of maxing it out if not already reached by pulling from his UGMA as well. Its designated as a UGMA still but he is currently age 20, never called TRowe to see if that status needs to change, I like that I still have access to it and he really doesnt track it....which I hope is a good thing to prevent any withdrawal ideas : )

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Tue Oct 30, 2018 9:02 am

Spirit Rider wrote:
Tue Oct 30, 2018 8:51 am
As long as the total unearned income is <= $4700, his LTCG tax rate will be 0%. Just be sure to factor any amounts of unearned income that already will be received. E.g. Interest, dividends and mutual fund distributions.
Thanks, I will look at unearned amounts. We have never sold any of UGMA before, Im assuming its his for tax purposes since Im just the custodian.....

PFInterest
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Re: Help with college age sons Roth IRA options...

Post by PFInterest » Tue Oct 30, 2018 9:08 am

ndnboy wrote:
Tue Oct 30, 2018 9:00 am
PFInterest wrote:
Tue Oct 30, 2018 8:53 am
Is the utma not theirs already?
You can consider matching his contribution.

We plan to match his annual investment, like the idea of maxing it out if not already reached by pulling from his UGMA as well. Its designated as a UGMA still but he is currently age 20, never called TRowe to see if that status needs to change, I like that I still have access to it and he really doesnt track it....which I hope is a good thing to prevent any withdrawal ideas : )
Varies by state, but if for 18 and it is legally his he could technically sue for it.

Spirit Rider
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Re: Help with college age sons Roth IRA options...

Post by Spirit Rider » Tue Oct 30, 2018 9:26 am

If he is a college student dependent < age 24, he will be subject to "kiddie tax" rules on unearned income. Since he has >= $750 in earned income, he will only receive $350 in an unearned income standard deduction.

Any unearned income > $350 will be subject to his marginal tax rates up to $2100. The ordinary income tax rate will be 10% and the LTCG/QDIV tax rate will be 0%>

It used to be that the amounts > $2100 were taxed at the parent's marginal tax rates. Starting in 2018 under the tax reform, those amount are subject to trust marginal tax rates. The first $2550 in ordinary income ($2100 - $4650) is subject to a 10% rate. The first $2600 in LTCG/QDIV ($2100 - $4700) is subject to a 0% rate.

He will have to file Form 8615. It is best to use tax software and have them figure this out.

Note: Unless his earned income + unearned income > his $12K standard deduction he will not owe any income taxes on his earned income.

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Tue Oct 30, 2018 9:30 am

PFInterest wrote:
Tue Oct 30, 2018 9:08 am
ndnboy wrote:
Tue Oct 30, 2018 9:00 am
PFInterest wrote:
Tue Oct 30, 2018 8:53 am
Is the utma not theirs already?
You can consider matching his contribution.

We plan to match his annual investment, like the idea of maxing it out if not already reached by pulling from his UGMA as well. Its designated as a UGMA still but he is currently age 20, never called TRowe to see if that status needs to change, I like that I still have access to it and he really doesnt track it....which I hope is a good thing to prevent any withdrawal ideas : )
Varies by state, but if for 18 and it is legally his he could technically sue for it.
Thx, no worries, its HIS money, just not advertising he can start doing much with it other than saving more.

Spirit Rider
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Re: Help with college age sons Roth IRA options...

Post by Spirit Rider » Tue Oct 30, 2018 9:40 am

What state were you in when you created this custodial account. Are you sure it is a UGMA and not a UTMA. As of 1998 only SC and VT still had UGMA accounts. All other states had migrated to UTMA for new accounts by then. Effective 7/1/15 VT adopted UTMAs, with SC being the last holdout.

One distinction is that a UGMA beneficiary can access the account on their own at age of termination. With a UTMA only the custodian or a court order can transfer control to the beneficiary.

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Tue Oct 30, 2018 9:54 am

Spirit Rider wrote:
Tue Oct 30, 2018 9:26 am
If he is a college student dependent < age 24, he will be subject to "kiddie tax" rules on unearned income. Since he has >= $750 in earned income, he will only receive $350 in an unearned income standard deduction.

Any unearned income > $350 will be subject to his marginal tax rates up to $2100. The ordinary income tax rate will be 10% and the LTCG/QDIV tax rate will be 0%>

It used to be that the amounts > $2100 were taxed at the parent's marginal tax rates. Starting in 2018 under the tax reform, those amount are subject to trust marginal tax rates. The first $2550 in ordinary income ($2100 - $4650) is subject to a 10% rate. The first $2600 in LTCG/QDIV ($2100 - $4700) is subject to a 0% rate.

He will have to file Form 8615. It is best to use tax software and have them figure this out.

Note: Unless his earned income + unearned income > his $12K standard deduction he will not owe any income taxes on his earned income.
Yes, he is a college student dependent < age 24, dont have his total income from last year but found that he had $96.49 Dividends and $497.12 Cap Gains on his 1099DIV.

So if he earns >= $4700 this year, he can withdraw $4700 (minus unearned income) with no tax liability on that $4700? Is that because you can show it went into a Roth?

Ive never had a Roth but thought you paid taxes on the money before going in, is this different in his case because of age, student, salary?? So 10% tax on his earnings and 0% on UGMA withdrawal (Not the 15% LTCG)?

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Tue Oct 30, 2018 10:01 am

Spirit Rider wrote:
Tue Oct 30, 2018 9:40 am
What state were you in when you created this custodial account. Are you sure it is a UGMA and not a UTMA. As of 1998 only SC and VT still had UGMA accounts. All other states had migrated to UTMA for new accounts by then. Effective 7/1/15 VT adopted UTMAs, with SC being the last holdout.

One distinction is that a UGMA beneficiary can access the account on their own at age of termination. With a UTMA only the custodian or a court order can transfer control to the beneficiary.
We are in MD Yes, I belive its a UTMA Im use to using the UGMA for some reason.

Spirit Rider
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Re: Help with college age sons Roth IRA options...

Post by Spirit Rider » Tue Oct 30, 2018 5:21 pm

ndnboy wrote:
Tue Oct 30, 2018 9:54 am
Yes, he is a college student dependent < age 24, dont have his total income from last year but found that he had $96.49 Dividends and $497.12 Cap Gains on his 1099DIV.

So if he earns >= $4700 this year, he can withdraw $4700 (minus unearned income) with no tax liability on that $4700? Is that because you can show it went into a Roth?
No, it actually has nothing to do with if he makes the Roth IRA contributions with the money. It is simply what the taxes would be on those capital gains. This is why I said it would be prudent to do what is called "tax-gain harvest" the gains even if you wanted to leave the funds in the UTMA. You would be eliminating the gains with no tax liability, but reducing future tax liability. The Roth simply eliminates all future tax liability for qualified withdrawals.
I've never had a Roth but thought you paid taxes on the money before going in, is this different in his case because of age, student, salary?? So 10% tax on his earnings and 0% on UGMA withdrawal (Not the 15% LTCG)?
It is just that the unearned taxation is different under the Kiddie Tax rules. There is no taxation up to the $350 unearned income standard deduction (with earned income >= $750). Then there is 10% tax on up to the next $2100 - 350 + $2550 in ordinary income and or $2100 - 350 + $2600 in LTCG/QDIV income.

In fact >= age 24, like all single taxpayers there no income tax up to the $12K standard deduction on all earned and unearned income. Then ordinary income is taxed at 10% up to $9,525 and 12% up to $38,700. The 0% LTCG/QDIV rate applies after the standard deduction up to $38,600. Ordinary income is taxed first, then LTCG/QDIV income

The 15% LTCG/QDIV rate does not apply under kiddie tax rules until > $4700. The 15% LTCG/QDIV rate does not apply to all other single taxpayers until > $50,600.

Note: The differences between the ordinary income tax brackets/LTCG/QDIV tax brackets are not typos. The trust 10%/0% brackets are $2550/$2600 and the single 12%/15% brackets are $38,700/$38,600. Only congress could be this bizarre.

123
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Re: Help with college age sons Roth IRA options...

Post by 123 » Tue Oct 30, 2018 5:38 pm

At his age in a Roth he should use a Total Stock Market fund 100%. Sure it will go up and down. But in a Roth he's got likely 40 years or more of tax-free growth potential.
The closest helping hand is at the end of your own arm.

ndnboy
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Re: Help with college age sons Roth IRA options...

Post by ndnboy » Wed Oct 31, 2018 4:35 am

Spirit Rider wrote:
Tue Oct 30, 2018 5:21 pm
ndnboy wrote:
Tue Oct 30, 2018 9:54 am
Yes, he is a college student dependent < age 24, dont have his total income from last year but found that he had $96.49 Dividends and $497.12 Cap Gains on his 1099DIV.

So if he earns >= $4700 this year, he can withdraw $4700 (minus unearned income) with no tax liability on that $4700? Is that because you can show it went into a Roth?
No, it actually has nothing to do with if he makes the Roth IRA contributions with the money. It is simply what the taxes would be on those capital gains. This is why I said it would be prudent to do what is called "tax-gain harvest" the gains even if you wanted to leave the funds in the UTMA. You would be eliminating the gains with no tax liability, but reducing future tax liability. The Roth simply eliminates all future tax liability for qualified withdrawals.
I've never had a Roth but thought you paid taxes on the money before going in, is this different in his case because of age, student, salary?? So 10% tax on his earnings and 0% on UGMA withdrawal (Not the 15% LTCG)?
It is just that the unearned taxation is different under the Kiddie Tax rules. There is no taxation up to the $350 unearned income standard deduction (with earned income >= $750). Then there is 10% tax on up to the next $2100 - 350 + $2550 in ordinary income and or $2100 - 350 + $2600 in LTCG/QDIV income.

In fact >= age 24, like all single taxpayers there no income tax up to the $12K standard deduction on all earned and unearned income. Then ordinary income is taxed at 10% up to $9,525 and 12% up to $38,700. The 0% LTCG/QDIV rate applies after the standard deduction up to $38,600. Ordinary income is taxed first, then LTCG/QDIV income

The 15% LTCG/QDIV rate does not apply under kiddie tax rules until > $4700. The 15% LTCG/QDIV rate does not apply to all other single taxpayers until > $50,600.

Note: The differences between the ordinary income tax brackets/LTCG/QDIV tax brackets are not typos. The trust 10%/0% brackets are $2550/$2600 and the single 12%/15% brackets are $38,700/$38,600. Only congress could be this bizarre.
Thanks for explaining in detail.

We opened his Roth acct at Merrill yesterday and hope to fund within a few days.

I pulled his W2 and found he had $4K in income for 2017 ($3400 from work, $100 ord div, $500 CG dist), and received a $300 refund.

Our plan is to withdraw $3K from his UGMA to fund the act with minimum. By Apr '19 (or as early as W2 comes in) we would max out if needed with UGMA withdrawal as well (based on his total income).

With his current balance around $23K it will take years to withdraw from his UGMA to max out the tax free Roth.............It seems like this will benefit him with low/0 kiddie tax base on age/income, and let the money grow tax free in his New Roth....... Is that a good understanding and Best approach?

Thx.

Spirit Rider
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Re: Help with college age sons Roth IRA options...

Post by Spirit Rider » Wed Oct 31, 2018 8:09 am

IRA contributions can be made up to the tax filing deadline. However, capital gains are always taxable in the year of sale.

Note: As I stated, it is always beneficial to tax gain harvest up to the tax-free limits even if not withdrawing all the funds from the UTMA. IRS time restrictions do not apply to tax gain harvesting like they do with tax loss harvesting.

However, mutual fund companies have short-term trading fees and roundtrip restrictions. These are typically 30 days. You will still need trading pairs.

ndnboy
Posts: 81
Joined: Tue Apr 17, 2018 5:16 am

Re: Help with college age sons Roth IRA options...

Post by ndnboy » Wed Oct 31, 2018 8:40 am

Spirit Rider wrote:
Wed Oct 31, 2018 8:09 am
IRA contributions can be made up to the tax filing deadline. However, capital gains are always taxable in the year of sale.

Note: As I stated, it is always beneficial to tax gain harvest up to the tax-free limits even if not withdrawing all the funds from the UTMA. IRS time restrictions do not apply to tax gain harvesting like they do with tax loss harvesting.

However, mutual fund companies have short-term trading fees and roundtrip restrictions. These are typically 30 days. You will still need trading pairs.
His $23K UGMA has about $14K in LTCG, if his income stays the same (approx $4K) and we withdraw $3K to fund Roth now (with full match amount later/possibly another $1K)....

What else / and amount can I withdraw to take advantage of tax gain harvesting?

And do i then place in trading pair to his TRowe Blue Chip fund? (What?)

That would give him a tax free withdrawal and set himself up in new fund with a new coast basis (removing the LTCGs)???

Thx, sorry its taking alot of explaining, appreciate help.

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

Re: Help with college age sons Roth IRA options...

Post by Spirit Rider » Wed Oct 31, 2018 8:58 am

The amount of total unearned income must be < the kiddie tax limit (2018 = $2100) + the 0% LTCG/QDIV trust bracket (2018 = $2600) for tax-free capital gains.

I do not have a T. Rowe Price account, so I don't know what a good training pair would be. You would want a fund with a very similar asset allocation and minimal tracking variance.

Bogleheads?

ndnboy
Posts: 81
Joined: Tue Apr 17, 2018 5:16 am

Re: Help with college age sons Roth IRA options...

Post by ndnboy » Thu Nov 01, 2018 5:50 am

Spirit Rider wrote:
Wed Oct 31, 2018 8:58 am
The amount of total unearned income must be < the kiddie tax limit (2018 = $2100) + the 0% LTCG/QDIV trust bracket (2018 = $2600) for tax-free capital gains.

I do not have a T. Rowe Price account, so I don't know what a good training pair would be. You would want a fund with a very similar asset allocation and minimal tracking variance.

Bogleheads?
Ok, Thx. I believe I understand now, his unearned income form fund ($400) < the kiddie tax limit (2018 = $2100)

If we withdraw the $3-4K from his UGMA for the Roth, it will/should be under the $2600 LTCG for the, + 0% LTCG/QDIV trust bracket (2018 = $2600) for tax-free capital gains part.

We plan to go with VTSMX for his Roth at Merrill (believe SCHB wasn't available)

If we cash out more than the $2600 limit, he would have to pay income/CG tax on it? And we would have to find a pair or new fund to contribute since the Roth would be maxed out.

Tx again

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