529 investment for California resident

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Topic Author
gurusw
Posts: 208
Joined: Sun May 11, 2008 9:37 am

529 investment for California resident

Post by gurusw »

Hi,

"529 for CA" has been discussed multiple times on this forum. But I had some specific Qs for my situation. Hence this post.

I don't have 529 plan yet. But looking to open one this year. My son is 13, and entered 7th grade this year. I already have taxable & retirement accounts with both Vanguard and Fidelity.

I currently have $7K in my son's Vanguard UTMA account, and I am looking to transfer this to 529.
- If I opt for scholarshare (TIAA) or Fidelity (Unique), would the transfer frm VG get complicated?
- Should I just stick to Vanguard's (Nevada) plan to make things easier?

There is a $30K limit for married couples for annual contribution to 529 plan.
- The UTMA transfer won't count towards this amount, right?

The Fidelity funds has different years (2021, 2024,... 2039). Does the year belong to the freshman year, or the senior year?
Also the Fidelity funds have 5 different classes of shares (C, P, I, ..). What are these classes?

Also do you know up till which year are we allowed to contribute to 529? Is it till the last year of HS, or till the last year of college?

If the grandpa wants to contribute to 529 plan from a foreign country, can he fund the account that I open for my son? Or is it just easy for him to give me the monies, and I use it to fund 529?
- The caveat of the latter option is, it will run into my annual limits to 529 contributions.

Finally my computer says scholarshare.com is not safe URL, but it allows me to access scholarshare529.com
Is it the same website under two domains? If they are having security issues, I'd rather invest my money with Fidelity or Vanguard.
novemberrain
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Re: 529 investment for California resident

Post by novemberrain »

If your child is already 13, I would advise to skip adding any new money to 529. Since there is only maybe 5 years before you need to withdraw, you will need to invest in very conservative investments and those typically won't produce any large gains in 5 years.
inbox788
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Re: 529 investment for California resident

Post by inbox788 »

What are we talking about here, a few thousand here or there or funding 4 years of private plus graduate/professional school? There's always the concern the kid misspends the funds. And there's the financial aid planning questions.

Easy answer is for smaller amounts, and shorter time periods, might as well keep it simple and stay with Vanguard. UTMA to 529 is a great idea. And if grandparents gift the funds to the child, he can add it to the 529.

You'll have to lookup what specific funds you're investing in, and decide if 0.1-0.5 expense fees over 5 years and $10k or whatever, that's going to be significant enough for you move it to another institution.

When did the funds go in the UTMA? They counted the year they were gifted, and now the funds belong to minor. You have to transfer to student 529, not your 529, and it has no impact to your current year gifting limits. There's also a provision to make 5 years contributions all at once, so look into that if it's a consideration.

Although they're good enough, I don't like the target year funds. First, they're usually higher fees. Also, I like to take more control over timing and allocation. They don't know when the student is a senior or graduating. And in California, there's not state tax deduction, so that's not a factor.
Topic Author
gurusw
Posts: 208
Joined: Sun May 11, 2008 9:37 am

Re: 529 investment for California resident

Post by gurusw »

novemberrain wrote: Mon Sep 07, 2020 12:39 am If your child is already 13, I would advise to skip adding any new money to 529. Since there is only maybe 5 years before you need to withdraw, you will need to invest in very conservative investments and those typically won't produce any large gains in 5 years.
Fair point. My son has almost 6 years to freshman year, and 9 years to senior year. I know that does not change the equation drastically. But thought I would point that out.
inbox788 wrote: Mon Sep 07, 2020 12:49 pm What are we talking about here, a few thousand here or there or funding 4 years of private plus graduate/professional school? There's always the concern the kid misspends the funds. And there's the financial aid planning questions.
I was thinking of funding 4 years of public school in 529. I have only one child, and so I do not have advantage to change beneficiary. I want to be conservative in putting my money so as not to attract penalties on the excess 529 amount. So I think that would work around to be $80K end goal for CA. Subtract $7K for UTMA transfer, and subtract some more amount for growth.
inbox788 wrote: Mon Sep 07, 2020 12:49 pm When did the funds go in the UTMA? They counted the year they were gifted, and now the funds belong to minor. You have to transfer to student 529, not your 529, and it has no impact to your current year gifting limits. There's also a provision to make 5 years contributions all at once, so look into that if it's a consideration.
The funds are sitting in UTMA for 10 years now. Would that warrant a student 529 now? How does that differ from parent 529, as far as financial aid considerations are concerned?

Given this information, would you still advise me to keep the investments in taxable? Maybe I can allocate bond portion of funds in 529 and save on some taxes during withdrawal?
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eye.surgeon
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Re: 529 investment for California resident

Post by eye.surgeon »

novemberrain wrote: Mon Sep 07, 2020 12:39 am If your child is already 13, I would advise to skip adding any new money to 529. Since there is only maybe 5 years before you need to withdraw, you will need to invest in very conservative investments and those typically won't produce any large gains in 5 years.
I disagree. A 529 is a savings and investment vehicle. The saving is as important as the investing. Don't stop saving, and a 529 beats saving in taxable or almost every other type of account.
"I would rather be certain of a good return than hopeful of a great one" | Warren Buffett
babystep
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Joined: Tue Apr 09, 2019 9:44 am

Re: 529 investment for California resident

Post by babystep »

gurusw wrote: Sun Sep 06, 2020 8:52 pm Hi,

"529 for CA" has been discussed multiple times on this forum. But I had some specific Qs for my situation. Hence this post.

I don't have 529 plan yet. But looking to open one this year. My son is 13, and entered 7th grade this year. I already have taxable & retirement accounts with both Vanguard and Fidelity.

I currently have $7K in my son's Vanguard UTMA account, and I am looking to transfer this to 529.
- If I opt for scholarshare (TIAA) or Fidelity (Unique), would the transfer frm VG get complicated?
- Should I just stick to Vanguard's (Nevada) plan to make things easier?

There is a $30K limit for married couples for annual contribution to 529 plan.
- The UTMA transfer won't count towards this amount, right?

The Fidelity funds has different years (2021, 2024,... 2039). Does the year belong to the freshman year, or the senior year?
Also the Fidelity funds have 5 different classes of shares (C, P, I, ..). What are these classes?

Also do you know up till which year are we allowed to contribute to 529? Is it till the last year of HS, or till the last year of college?

If the grandpa wants to contribute to 529 plan from a foreign country, can he fund the account that I open for my son? Or is it just easy for him to give me the monies, and I use it to fund 529?
- The caveat of the latter option is, it will run into my annual limits to 529 contributions.

Finally my computer says scholarshare.com is not safe URL, but it allows me to access scholarshare529.com
Is it the same website under two domains? If they are having security issues, I'd rather invest my money with Fidelity or Vanguard.
The correct web-site is www.scholarshare529.com. I would leave UTMA as it is and contribute separately 30k. I don't think it has to be a direct transfer from grandpa's account. Think of someone giving money for birthday for the kid and then you depositing it into the 529.
Topic Author
gurusw
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Re: 529 investment for California resident

Post by gurusw »

babystep wrote: Mon Sep 07, 2020 8:44 pm The correct web-site is www.scholarshare529.com. I would leave UTMA as it is and contribute separately 30k. I don't think it has to be a direct transfer from grandpa's account. Think of someone giving money for birthday for the kid and then you depositing it into the 529.
Why leave UTMA as it is? I read that for financial aid purposes, UTMA is counted as student's assets, and 529 is counted as parent's assets.

1. Although I heard about Student 529 for the first time in this thread. So I am not sure how Student 529 is counted, although sounds like it will be counted a student's assets.

2. Tax treatment for UTMA differs from 529 plan. Up to $1,050 in earnings are tax-free in UTMA. So maybe $7K is the right amount in the UTMA account, and everytime the earnings get closer to that amount, maybe I can switch funds to take advantage of tax-free earnings?
inbox788
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Re: 529 investment for California resident

Post by inbox788 »

gurusw wrote: Mon Sep 07, 2020 7:21 pmThe funds are sitting in UTMA for 10 years now. Would that warrant a student 529 now? How does that differ from parent 529, as far as financial aid considerations are concerned?

Given this information, would you still advise me to keep the investments in taxable? Maybe I can allocate bond portion of funds in 529 and save on some taxes during withdrawal?
Things have changed, so pay note to getting most recent requirements. My understanding is that there's now no difference between parent vs student 529 as far as financial need reduction, and both are better than UTMA and other cash assets.

https://www.savingforcollege.com/articl ... ancial-aid

The advantage of moving from UTMA to 529 now is that the gains going forward would be tax-free if used for qualified education, where as UTMA may be taxed depending on income levels.

I haven't gotten to the withdrawal stage, so haven't made a firm decision on how to proceed, but bonds don't make sense to me. The main advantage is to get tax-free gains, and with minimal gains in bonds, you might as well keep the flexibility in taxable. The only undecided factor I have is what happens if the investment tanks just before you need to pay tuition. In taxable, you get TLH, but that might go away with 529.
babystep
Posts: 253
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Re: 529 investment for California resident

Post by babystep »

gurusw wrote: Mon Sep 07, 2020 10:04 pm
babystep wrote: Mon Sep 07, 2020 8:44 pm The correct web-site is www.scholarshare529.com. I would leave UTMA as it is and contribute separately 30k. I don't think it has to be a direct transfer from grandpa's account. Think of someone giving money for birthday for the kid and then you depositing it into the 529.
Why leave UTMA as it is? I read that for financial aid purposes, UTMA is counted as student's assets, and 529 is counted as parent's assets.

1. Although I heard about Student 529 for the first time in this thread. So I am not sure how Student 529 is counted, although sounds like it will be counted a student's assets.

2. Tax treatment for UTMA differs from 529 plan. Up to $1,050 in earnings are tax-free in UTMA. So maybe $7K is the right amount in the UTMA account, and everytime the earnings get closer to that amount, maybe I can switch funds to take advantage of tax-free earnings?
Because it might complicate things. Just read your statement in bold. You have already given the money to the kid when you contributed to UTMA. You are not the real owner of the UTMA and you are just managing it for the kid who is the real owner. Now, you are taking it back because as you say that 529 is the parent's asset.
You may or may not be able to contribute it to 529 but as I said this just complicates. Hence, I will leave it as it is. Contribute cleanly to 529 and continue to enjoy the $1050 tax-free gains in the UTMA account.
inbox788
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Re: 529 investment for California resident

Post by inbox788 »

babystep wrote: Tue Sep 08, 2020 12:04 amBecause it might complicate things. Just read your statement in bold. You have already given the money to the kid when you contributed to UTMA. You are not the real owner of the UTMA and you are just managing it for the kid who is the real owner. Now, you are taking it back because as you say that 529 is the parent's asset.
You may or may not be able to contribute it to 529 but as I said this just complicates. Hence, I will leave it as it is. Contribute cleanly to 529 and continue to enjoy the $1050 tax-free gains in the UTMA account.
From above link (March 14, 2018):
The value of a 529 plan owned by a dependent student or one of their parents (529 plans do not allow joint ownership) is considered a parental asset on the FAFSA.
https://www.savingforcollege.com/articl ... ancial-aid
Topic Author
gurusw
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Joined: Sun May 11, 2008 9:37 am

Re: 529 investment for California resident

Post by gurusw »

Thank you inbox788.

So this is what I found out so far.... it seems I can transfer UTMA to 529 plan. There are two flavours of 529 plans: Regular 529 and UTMA-529. Tax treatment for the two flavors are the same. I will have to transfer UTMA to UTMA-529.

VG has a form to open either 529 plan. But they do not have a form to tarnsfer UTMA to UTMA-529! They told me that I should be asking my tax consultant how to transfer assets from UTMA to UTMA-529 :)

I find it weird. Has anyone here done UTMA to UTMA-529 transfer? Or should I engage in the 529-specific sites to get that info? Any recommendations which have good forums?
inbox788
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Re: 529 investment for California resident

Post by inbox788 »

gurusw wrote: Mon Sep 28, 2020 11:37 pmSo this is what I found out so far.... it seems I can transfer UTMA to 529 plan. There are two flavours of 529 plans: Regular 529 and UTMA-529. Tax treatment for the two flavors are the same. I will have to transfer UTMA to UTMA-529.

VG has a form to open either 529 plan. But they do not have a form to tarnsfer UTMA to UTMA-529! They told me that I should be asking my tax consultant how to transfer assets from UTMA to UTMA-529 :)

I find it weird. Has anyone here done UTMA to UTMA-529 transfer? Or should I engage in the 529-specific sites to get that info? Any recommendations which have good forums?
You reached the wrong rep at Vanguard. Ask for someone more experienced with 529 and UTMA. It's their account; there is nowhere else to go. I'm guessing you would simply open a 529 with a proper titling of accounts and beneficiary (i.e. both student) and they just have to click the UTMA box somewhere in their server to meet the legal transfer from parent to child at age 18.

They even have a calculator, though it probably doesn't take into account the tax benefits and kiddie tax correctly.
https://vanguard.wealthmsi.com/ugma.php

I might have understood incorrectly that the UTMA account was at Vanguard. If it's not, then it's like any other tax-advantaged account. If the funds are available, you should be able to transfer in kind. You might have to liquidate those that Vanguard doesn't have, but aside from being out of the market for a brief period, there should be no other consequences (as long as the funds are used for education). Tracking cost basis might be a problem down the road if you need it, so you might want to record those from the old account just in case. Still, I would expect Vanguard should be able to pull in all those for you.

https://investor.vanguard.com/account-t ... -questions
Topic Author
gurusw
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Re: 529 investment for California resident

Post by gurusw »

inbox, thanks again. I will call again to see if I get a better rep.

The UTMA account is at VG. I won't be able to do in-kind transfer because the same fund is not available in 529 account.

The initial investment in UTMA was $6,000, and now it stands at $7,500. Although I had changed the mutual fund once or twice. The gain on the current fund is $300. So when I liquidate UTMA for transfer, is my taxable amount $300 or $1,500?
inbox788
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Re: 529 investment for California resident

Post by inbox788 »

gurusw wrote: Tue Sep 29, 2020 10:57 pm inbox, thanks again. I will call again to see if I get a better rep.

The UTMA account is at VG. I won't be able to do in-kind transfer because the same fund is not available in 529 account.

The initial investment in UTMA was $6,000, and now it stands at $7,500. Although I had changed the mutual fund once or twice. The gain on the current fund is $300. So when I liquidate UTMA for transfer, is my taxable amount $300 or $1,500?
Neither. UTMA belongs to child. https://www.troweprice.com/personal-inv ... utmas.html

What accounts for the other $1200? Prior years?

I think if you put the gains on your return, you get taxed. If the child files a return, these amounts are below the Kiddie Tax threshold.
https://www.irs.gov/taxtopics/tc553
Topic Author
gurusw
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Re: 529 investment for California resident

Post by gurusw »

inbox788 wrote: Wed Sep 30, 2020 11:48 am
gurusw wrote: Tue Sep 29, 2020 10:57 pm inbox, thanks again. I will call again to see if I get a better rep.

The UTMA account is at VG. I won't be able to do in-kind transfer because the same fund is not available in 529 account.

The initial investment in UTMA was $6,000, and now it stands at $7,500. Although I had changed the mutual fund once or twice. The gain on the current fund is $300. So when I liquidate UTMA for transfer, is my taxable amount $300 or $1,500?
Neither. UTMA belongs to child. https://www.troweprice.com/personal-inv ... utmas.html

What accounts for the other $1200? Prior years?

I think if you put the gains on your return, you get taxed. If the child files a return, these amounts are below the Kiddie Tax threshold.
https://www.irs.gov/taxtopics/tc553
Yes, the other $1200 gain is from the prior years. But everytime I changed funds, it was less than $700 for a given tax year.

Looks like the tax is due (depending on the gains) everytime the funds are sold within the UTMA account, correct? So UTMA works like taxable account, not like 401k (where the tax is due when the amount is withdrawn).

But the tax was never due to us because of the kiddie tax rules (the income was less than $1050). Also I do not need to file returns for my kid, correct? https://www.irs.gov/publications/p929

Given this, I can keep exchanging funds within UTMA keeping the gains below $1050 for a given tax year; and I do not necessarily need to convert UTMA to UTMA-529 plan. Does that make sense, or are there any caveats?
inbox788
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Re: 529 investment for California resident

Post by inbox788 »

gurusw wrote: Wed Sep 30, 2020 10:21 pmBut the tax was never due to us because of the kiddie tax rules (the income was less than $1050). Also I do not need to file returns for my kid, correct? https://www.irs.gov/publications/p929

Given this, I can keep exchanging funds within UTMA keeping the gains below $1050 for a given tax year; and I do not necessarily need to convert UTMA to UTMA-529 plan. Does that make sense, or are there any caveats?
I don't know for sure. I've been confused by the requirement. If the child files taxes, it's ok, but if they don't you might have to. Which passage on the publication spells it out clearly? I've never seen it.

Yes, it would work for smaller amounts and you don't go over realizing gains over the limits. If you're going to spend the funds on qualified educational expenses, the 529 is easier and simpler. If you want flexibility, then leave them in the UTMA. Just don't go over, or you may owe more taxes.
Topic Author
gurusw
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Re: 529 investment for California resident

Post by gurusw »

inbox788 wrote: Wed Sep 30, 2020 11:26 pm
gurusw wrote: Wed Sep 30, 2020 10:21 pmBut the tax was never due to us because of the kiddie tax rules (the income was less than $1050). Also I do not need to file returns for my kid, correct? https://www.irs.gov/publications/p929
I don't know for sure. I've been confused by the requirement. If the child files taxes, it's ok, but if they don't you might have to. Which passage on the publication spells it out clearly? I've never seen it.
This table makes me believe that my son doesn't need to file returns: https://www.irs.gov/publications/p929#e ... nk10001487
inbox788
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Re: 529 investment for California resident

Post by inbox788 »

gurusw wrote: Thu Oct 01, 2020 7:55 pm
inbox788 wrote: Wed Sep 30, 2020 11:26 pm
gurusw wrote: Wed Sep 30, 2020 10:21 pmBut the tax was never due to us because of the kiddie tax rules (the income was less than $1050). Also I do not need to file returns for my kid, correct? https://www.irs.gov/publications/p929
I don't know for sure. I've been confused by the requirement. If the child files taxes, it's ok, but if they don't you might have to. Which passage on the publication spells it out clearly? I've never seen it.
This table makes me believe that my son doesn't need to file returns: https://www.irs.gov/publications/p929#e ... nk10001487
I don' t know what this means or if it applies, since the child doesn't have to file a return already based on your other criteria:
Parent's Election To Report Child's Interest and Dividends (Form 8814)
You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. If you do, your child won't have to file a return.
...
Election to report child's unearned income on parent's return. A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. See Parent's Election To Report Child's Interest and Dividends in Part 2. If the parent makes this election, the child doesn’t have to file a return.
I really don't know, but to me it doesn't say explicitly that "if the child is not required to file a return, you're off the hook for reporting it elsewhere such as Form 8814".

There's several ways for the child to satisfy the filing or non-filing requirement. Verify with a professional or better source about the parent requirement.
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