UGMA Account Investment Options

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Beatl61947
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UGMA Account Investment Options

Post by Beatl61947 »

Hello,

We have setup a UGMA account in Vanguard for our 12 year old son with money accumulated over the years from birthday gifts, Christmas gifts, etc., which is a bit over $20,000. The intention is that he will use this money for expenses in his college years, first car, or anything other than tuition. I have been looking at putting everything in VBIAX, but am not sure this is the most tax efficient when it comes time for him to sell and use the money in approximately 6 years. Any advice on better options? Want to remain relatively risk averse and would like to stay around a 60-40 stock/bond ratio. Would it be better to split between a Total Stock Index Fund and a Tax Free Municipal Bond Fund? Thanks.
Grt2bOutdoors
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Re: UGMA Account Investment Options

Post by Grt2bOutdoors »

You want to use VTMFX - tax managed balanced index. Still, VBAIX will have higher returns over longer term due to 60/40 split as opposed to tax managed balanced 50/50 split.
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dbr
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Re: UGMA Account Investment Options

Post by dbr »

If all the money is to be spent six years from now I would call 50/50-60/40 risky. Also as the time approaches the duration to spending is getting less. If the time line is more like 6-12 years maybe more risk could be taken, but it still goes down with time.
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Wiggums
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Re: UGMA Account Investment Options

Post by Wiggums »

What is the money invested in now?

Why would you use a municipal bond? The first $1,100 ($1,150 in 2022)of a child's unearned income qualifies for the standard deduction. Any unearned income beyond $2,200 is taxed at the parent's normal tax bracket. The money is being taxed at your son’s rate?
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inbox788
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Re: UGMA Account Investment Options

Post by inbox788 »

Wiggums wrote: Wed Nov 24, 2021 1:34 pm What is the money invested in now?

Why would you use a municipal bond? The first $1,100 ($1,150 in 2022)of a child's unearned income qualifies for the standard deduction. Any unearned income beyond $2,200 is taxed at the parent's normal tax bracket. The money is being taxed at your son’s rate?
Also, OP, what is your tax bracket? I'd aim to go over a little the thresholds and pay some tax, since there isn't that much deferment time to benefit vs losing out on an immediate benefit.

[I'm wondering if it might be helpful to use 2 or more funds for TLH/TGH opportunities.]

I don't think Munis make sense in this situation (amounts, time, tax rates), and probably stick with Total or Intermediate Bond as the default choice.
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grabiner
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Re: UGMA Account Investment Options

Post by grabiner »

Grt2bOutdoors wrote: Tue Nov 23, 2021 2:39 pm You want to use VTMFX - tax managed balanced index. Still, VBAIX will have higher returns over longer term due to 60/40 split as opposed to tax managed balanced 50/50 split.
I wouldn't recommend any balanced fund in a UGMA, because it is likely that the child will want to spend only part of the money, or might want to switch bond holdings. (In particular, if the UGMA is large enough that munis are needed to avoid the kiddie tax, then when the child is no longer subject to the kiddie tax, they will likely want to get out of muni funds because they are probably in a low tax bracket.) If the money is in separate bond and stock funds, the child can sell only the bond fund if appropriate, for little or no capital gain; if it is a balanced fund, bonds and stocks must be sold at the same time.
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Grt2bOutdoors
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Re: UGMA Account Investment Options

Post by Grt2bOutdoors »

grabiner wrote: Wed Nov 24, 2021 9:08 pm
Grt2bOutdoors wrote: Tue Nov 23, 2021 2:39 pm You want to use VTMFX - tax managed balanced index. Still, VBAIX will have higher returns over longer term due to 60/40 split as opposed to tax managed balanced 50/50 split.
I wouldn't recommend any balanced fund in a UGMA, because it is likely that the child will want to spend only part of the money, or might want to switch bond holdings. (In particular, if the UGMA is large enough that munis are needed to avoid the kiddie tax, then when the child is no longer subject to the kiddie tax, they will likely want to get out of muni funds because they are probably in a low tax bracket.) If the money is in separate bond and stock funds, the child can sell only the bond fund if appropriate, for little or no capital gain; if it is a balanced fund, bonds and stocks must be sold at the same time.
You make a very good point. I wouldn’t go with a balanced fund myself, but that’s what the OP wanted to use. I use VTSAX for my kids account.
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inbox788
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Re: UGMA Account Investment Options

Post by inbox788 »

With 20k and some growth in next 5-7 years, and mostly spent on college expenses and a first car, I don't think there's much chance there's any left to worry about. And does TLH/TGH matter in the short time and gains involved? You'd want to capture the ~2.2k unearned income gain, but don't see much advantage beyond that. One fund, any fund, might be simpler to manage thru this time period. I'd pick TSM over balanced fund myself.
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