Utma investment

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Jamthony19974
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Joined: Thu Feb 08, 2024 8:28 am

Utma investment

Post by Jamthony19974 »

Good morning friends,

Having a baby in less than 10 days and plan on opening an utma along side an 529. Any fund suggestions for the utma? I’m guessing it would need to be an index fund so it would be more tax efficient ? I like vanguard 500 index fund but at the same time Fidelity 500 offers no minimum investment. Also, I see utma’s can affect financial aid, what if I plan to use the utma for the child before they go to college. Example, child has $16,000 in the utma by age 17 and I withdraw the full $16k to buy them a car. Then in result when they turn 18 the balance is $0. Then it wouldn’t cause a financial aid issue right?
Thank you all for any feedback. #stayTheCourse
Last edited by Jamthony19974 on Sun Feb 11, 2024 3:47 pm, edited 1 time in total.
rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Utma investment

Post by rkhusky »

Use a fund that you don’t hold in any of your accounts to avoid wash sale issues.
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Wiggums
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Re: Utma investment

Post by Wiggums »

FAFSA looks back 2 years to determine what your income will be for the upcoming school year. For example, if your child is going to be a freshman in college in the fall of 2024, you will report your 2022 income on the FAFSA application.
"I started with nothing and I still have most of it left."
Iorek
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Joined: Fri Mar 08, 2013 8:38 am

Re: Utma investment

Post by Iorek »

My advice, and I apologize for going OT as it were, is not to open a UTMA.

IME they are a PITA and rarely are they necessary or the best option.

I would focus most of my saving on the 529– the tax-free treatment of earnings is pretty rare.

For money you’d like to save outside a 529, I’d just do your preferred index fund in a brokerage account in your name. You can certainly open this in a separate account or just keep a mental accounting. Then when your child is of age you can transfer the funds directly (preferably in a way that avoids gift tax reporting but for most of us that isn’t a problem— 18-36k/year inflation indexed).

The advantages of this are that 1) your child won’t have to deal with retitling the account when they are of age; dealing with financial institutions on this is well beyond my patience and attention span, much less that of a 20 year old; 2) you have more control over when and how to disburse the funds— in 18 years you will know your child better and know whether it’s an issue for them to have access upon majority to a large sum; 3) you don’t need to worry about FAFSA issues; and 4) per above it’s easy to transfer reasonable sums when the time comes without tax consequences.

I guess there might be a minor disadvantage in that dividends will be taxable to you at your rate vs your child paying (or not paying) at their rate but low rates of dividends these days and the kiddie tax rules make that mostly a nonissue imo.
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