Tax gain harvest UTMA rather than 529

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Brianjp18
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Joined: Tue May 25, 2021 3:52 pm

Tax gain harvest UTMA rather than 529

Post by Brianjp18 »

I have a 529 and a UGMA taxable account for my child. I’m trying to decide where to allocate money as the years pass as my child is only two. Do you think it makes more sense to direct money into the UTMA and just tax gain harvest when needed rather than going into a 529? This way the money has more flexibility. I’m not really concerned with how the child’s assets affect financial aid. The purpose of the money would be for any combination of education, vehicle, future home.

Is there any downside to the approach of investing money in the utma and tax gain harvesting?
livesoft
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Re: Tax gain harvest UTMA rather than 529

Post by livesoft »

Do both. 529 plans are for wealthy and high income families. If you can afford to contribute to a 529 plan, then you can afford to contribute to both a 529 plan and a UTMA/UGMA.
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Da5id
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Re: Tax gain harvest UTMA rather than 529

Post by Da5id »

Brianjp18 wrote: Mon Aug 01, 2022 7:27 am I have a 529 and a UGMA taxable account for my child. I’m trying to decide where to allocate money as the years pass as my child is only two. Do you think it makes more sense to direct money into the UTMA and just tax gain harvest when needed rather than going into a 529? This way the money has more flexibility. I’m not really concerned with how the child’s assets affect financial aid. The purpose of the money would be for any combination of education, vehicle, future home.

Is there any downside to the approach of investing money in the utma and tax gain harvesting?
If you have enough income/assets to not care about future financial aid, is tax gain harvesting likely to work well? The Kiddie Tax https://www.irs.gov/instructions/i8615# ... k100045811 could come into the picture perhaps?
MBB_Boy
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Re: Tax gain harvest UTMA rather than 529

Post by MBB_Boy »

Da5id wrote: Mon Aug 01, 2022 8:00 am
Brianjp18 wrote: Mon Aug 01, 2022 7:27 am I have a 529 and a UGMA taxable account for my child. I’m trying to decide where to allocate money as the years pass as my child is only two. Do you think it makes more sense to direct money into the UTMA and just tax gain harvest when needed rather than going into a 529? This way the money has more flexibility. I’m not really concerned with how the child’s assets affect financial aid. The purpose of the money would be for any combination of education, vehicle, future home.

Is there any downside to the approach of investing money in the utma and tax gain harvesting?
If you have enough income/assets to not care about future financial aid, is tax gain harvesting likely to work well? The Kiddie Tax https://www.irs.gov/instructions/i8615# ... k100045811 could come into the picture perhaps?
Kiddie tax only applies to LTCG / dividends abover ~2600 in a year. That's PLENTY of tax gain harvesting
MBB_Boy
Posts: 565
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Re: Tax gain harvest UTMA rather than 529

Post by MBB_Boy »

OP,

I asked a similar question recently. Here's the thread: viewtopic.php?t=381698

Long story short, lots of warnings about giving kids access to money at 18
Da5id
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Re: Tax gain harvest UTMA rather than 529

Post by Da5id »

MBB_Boy wrote: Mon Aug 01, 2022 8:55 am
Da5id wrote: Mon Aug 01, 2022 8:00 am
Brianjp18 wrote: Mon Aug 01, 2022 7:27 am I have a 529 and a UGMA taxable account for my child. I’m trying to decide where to allocate money as the years pass as my child is only two. Do you think it makes more sense to direct money into the UTMA and just tax gain harvest when needed rather than going into a 529? This way the money has more flexibility. I’m not really concerned with how the child’s assets affect financial aid. The purpose of the money would be for any combination of education, vehicle, future home.

Is there any downside to the approach of investing money in the utma and tax gain harvesting?
If you have enough income/assets to not care about future financial aid, is tax gain harvesting likely to work well? The Kiddie Tax https://www.irs.gov/instructions/i8615# ... k100045811 could come into the picture perhaps?
Kiddie tax only applies to LTCG / dividends abover ~2600 in a year. That's PLENTY of tax gain harvesting
I'm well aware. My kids were hit by the Kiddie tax many years, and there was no room for gain harvesting during that point. It is just a consideration if the amount of money is involved is considerable. Which it could easily become with gifts of up to $32K/year. Depending on the amounts involved and how it is invested, could hit the $2600 in a few years with just dividends.
Da5id
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Re: Tax gain harvest UTMA rather than 529

Post by Da5id »

MBB_Boy wrote: Mon Aug 01, 2022 8:56 am OP,

I asked a similar question recently. Here's the thread: viewtopic.php?t=381698

Long story short, lots of warnings about giving kids access to money at 18
I agree with this, though it is 21 in some states. 21 isn't necessarily much better than 18 though.
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Lee_WSP
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Re: Tax gain harvest UTMA rather than 529

Post by Lee_WSP »

livesoft wrote: Mon Aug 01, 2022 7:55 am Do both. 529 plans are for wealthy and high income families. If you can afford to contribute to a 529 plan, then you can afford to contribute to both a 529 plan and a UTMA/UGMA.
If you want to stay under the annual exemption, you need to choose how to allocate it.
MDivision
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Re: Tax gain harvest UTMA rather than 529

Post by MDivision »

We are funding a UTMA exactly for the purpose you are describing. The idea is to have the child determine what they need to spend on in their 20s when they are in high need of a financial boost. Since the risk of abuse is higher and time horizon is longer we are putting in a smaller amount and investing aggressively in hope of growth.

The 529 is in our control so we are more aggressively funding that for children and grandchildren schooling.
Livesey
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Re: Tax gain harvest UTMA rather than 529

Post by Livesey »

Maybe a dumb question, but why not wait until the child turns 18 or 21 and then have them tax gain harvest on their own tax return at that time presumably when they are in a low income bracket?

We don’t fund UTMAs for our kids personally, but when family members give them monetary gifts we drop those into UTMAs on their behalf. Recognizing the appropriate watchouts from earlier in the thread about handing a pile of money to an 18 year old, we view this as a fair way of giving them their money. In my brief research it seemed more efficient to let the kids tax gain harvest as adults rather than deal with kiddie tax issues along the way.
exodusNH
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Re: Tax gain harvest UTMA rather than 529

Post by exodusNH »

Livesey wrote: Tue Aug 02, 2022 1:20 am Maybe a dumb question, but why not wait until the child turns 18 or 21 and then have them tax gain harvest on their own tax return at that time presumably when they are in a low income bracket?

We don’t fund UTMAs for our kids personally, but when family members give them monetary gifts we drop those into UTMAs on their behalf. Recognizing the appropriate watchouts from earlier in the thread about handing a pile of money to an 18 year old, we view this as a fair way of giving them their money. In my brief research it seemed more efficient to let the kids tax gain harvest as adults rather than deal with kiddie tax issues along the way.
As long as you stay under the limits, there are not tax issues. Just free gains.
Topic Author
Brianjp18
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Re: Tax gain harvest UTMA rather than 529

Post by Brianjp18 »

Livesey wrote: Tue Aug 02, 2022 1:20 am Maybe a dumb question, but why not wait until the child turns 18 or 21 and then have them tax gain harvest on their own tax return at that time presumably when they are in a low income bracket?

We don’t fund UTMAs for our kids personally, but when family members give them monetary gifts we drop those into UTMAs on their behalf. Recognizing the appropriate watchouts from earlier in the thread about handing a pile of money to an 18 year old, we view this as a fair way of giving them their money. In my brief research it seemed more efficient to let the kids tax gain harvest as adults rather than deal with kiddie tax issues along the way.
I think one disadvantage to waiting that long, presuming you start investing for the kid at an early age, is there could be a substantial amount of gains to tax harvest come age 18-21. If you tax gain harvest every year, or every few years (granted there are gains), you would be skimming off a smaller amount of gains and resetting the cost basis each time. I could be wrong on this, but that is how I understand it. I guess it also depends on how the money is going to be used. If a large lump sum was being used at age 18-21 you would obviously have more LTCG taxes to pay versus a gradual withdrawal.
brawlrats
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Re: Tax gain harvest UTMA rather than 529

Post by brawlrats »

Livesey wrote: Tue Aug 02, 2022 1:20 am Maybe a dumb question, but why not wait until the child turns 18 or 21 and then have them tax gain harvest on their own tax return at that time presumably when they are in a low income bracket?

We don’t fund UTMAs for our kids personally, but when family members give them monetary gifts we drop those into UTMAs on their behalf. Recognizing the appropriate watchouts from earlier in the thread about handing a pile of money to an 18 year old, we view this as a fair way of giving them their money. In my brief research it seemed more efficient to let the kids tax gain harvest as adults rather than deal with kiddie tax issues along the way.
To add to the other comments, full time students between the ages of 19 and 23 remain subject to kiddie tax, unless they have earned income sufficient to provide at least half of their support (i.e., they are no longer dependents).
986racer
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Re: Tax gain harvest UTMA rather than 529

Post by 986racer »

If you are in the tax bracket where you are considering this, you likely don't qualify for AOTC, but your child will. This will let you tax gain harvest a bunch more (kiddie tax comes into play here as it is the mechanism by which the student will get taxable income)

The details of how to do this is in this thread: viewtopic.php?p=6799643#p6799643
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