UGMA/UTMA/529 for newborn

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semperlux
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UGMA/UTMA/529 for newborn

Post by semperlux » Mon Mar 24, 2014 6:08 am

Just added a new addition to the family couple monts ago. Reading about UGMA, UTMA, & 529 accounts. Specifically this thread: http://www.bogleheads.org/forum/viewtopic.php?t=66805

Are most people only going with 529s? Or do people still use a combo of UGMA / UTMA accounts with 529s? Some on the above thread have both only because there was no 529 when they started saving for their children.

I'm definitely starting a 529 for education, but I'm also thinking of starting a UGMA/UTMA account to 1) to have money for noneducation use (eg when child gets old enough to ask me for a car), 2) teach my child about taxes, how to save & invest 3) diversify the money so it's not all stuck in 529.

Other considerations would be the 20% of the UGMA / UTMA money counting towards FAFSA calculations, versus the 5% if money counted as belonging to parents.

Lower investment tax if child invests money in their own accounts, typically 10% in lowest bracket versus investing through parents accounts paying the marginal rate.

What does everyone think? How are you managing your child's money?

livesoft
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Re: UGMA/UTMA/529 for newborn

Post by livesoft » Mon Mar 24, 2014 6:11 am

When my kid got old enough to ask me for a car, I said, "I'm not paying for your car. Go get a job."

The bottom line is that all these accounts are meant to save you on taxes and don't really have any benefit to the child over you keeping your money and putting it in your retirement plans or your own taxable accounts. That's because you can always give your children money anytime you have it.
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dickenjb
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Re: UGMA/UTMA/529 for newborn

Post by dickenjb » Mon Mar 24, 2014 7:29 am

1. I would not put a dime into a 529 until I had maxed out all tax advantaged retirement options - 401(k), Roth IRA, etc.

2. A child can earn up to $2000 a year in investment income TAX FREE so there is a net advantage to the family for the child to have an UGMA earning this amount each year (roughly $20-30K) Note this income is tax free with no restrictions whereas earnings on a 529 are only tax free if used for QHEE. Furthermore, even the cheapest 529 plans are 3x more expensive than a Vanguard UGMA invested in VTSAX.

3. AFTER I had maxed out my and spouses retirement plans AND funded the UGMA then I would start a 529. Both Utah and NY plans are excellent.

In my opinion, a parent who is maxing out his and her retirement plans each year and still thinking about funding an UGMA and/or 529 isn't getting squat in need based aid anyway. So I would not worry about FAFSA. YMMV.

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Re: UGMA/UTMA/529 for newborn

Post by Grt2bOutdoors » Mon Mar 24, 2014 7:31 am

I've been using a combination of 529 plan, UTMA and taxable. If the 529 plan assets become worth enough to pay for schooling after any possible merit aid, then the UTMA will be used as a springboard to start life off with (but not for a car!). In fact, it's my plan to tell my child that the UTMA is for college early on, so they don't get any ideas about a new or used car, spring break vacation to Cancun or any other nonsense. I hold the bulk of college savings money in the 529 plan, less legal headaches (just view the threads on who owns the assets in a UTMA account). The taxable accounts are in me and my spouse's name only - intended for retirement, but if need be we will use it to pay for college.
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Re: UGMA/UTMA/529 for newborn

Post by Grt2bOutdoors » Mon Mar 24, 2014 7:33 am

dickenjb wrote:1. I would not put a dime into a 529 until I had maxed out all tax advantaged retirement options - 401(k), Roth IRA, etc.

2. A child can earn up to $2000 a year in investment income TAX FREE so there is a net advantage to the family for the child to have an UGMA earning this amount each year (roughly $20-30K) Note this income is tax free with no restrictions whereas earnings on a 529 are only tax free if used for QHEE. Furthermore, even the cheapest 529 plans are 3x more expensive than a Vanguard UGMA invested in VTSAX.

3. AFTER I had maxed out my and spouses retirement plans AND funded the UGMA then I would start a 529. Both Utah and NY plans are excellent.

In my opinion, a parent who is maxing out his and her retirement plans each year and still thinking about funding an UGMA and/or 529 isn't getting squat in need based aid anyway. So I would not worry about FAFSA. YMMV.
30K at a yield of roughly 2% is $600. How do you get $2K in a UTMA/UGMA account? I use a UTMA account and haven't breached $1K yet, let alone $2K per year.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: UGMA/UTMA/529 for newborn

Post by freddie » Mon Mar 24, 2014 7:56 am

I agree about funding retirement first but you can be pretty high income and still get financial aid. I know a couple that will have 3 kids in college for most of their years (singleton followed 12 months later by twins). If those 3 kids went to some 50k/yr school, you could me making 200k and still expect aid.

One issue withe UTMA/UGMA is that the kid gets control at 18.
dickenjb wrote:1. I would not put a dime into a 529 until I had maxed out all tax advantaged retirement options - 401(k), Roth IRA, etc.

2. A child can earn up to $2000 a year in investment income TAX FREE so there is a net advantage to the family for the child to have an UGMA earning this amount each year (roughly $20-30K) Note this income is tax free with no restrictions whereas earnings on a 529 are only tax free if used for QHEE. Furthermore, even the cheapest 529 plans are 3x more expensive than a Vanguard UGMA invested in VTSAX.

3. AFTER I had maxed out my and spouses retirement plans AND funded the UGMA then I would start a 529. Both Utah and NY plans are excellent.

In my opinion, a parent who is maxing out his and her retirement plans each year and still thinking about funding an UGMA and/or 529 isn't getting squat in need based aid anyway. So I would not worry about FAFSA. YMMV.

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Re: UGMA/UTMA/529 for newborn

Post by dickenjb » Mon Mar 24, 2014 8:03 am

Grt2bOutdoors wrote:
dickenjb wrote:...A child can earn up to $2000 a year in investment income TAX FREE so there is a net advantage to the family for the child to have an UGMA earning this amount each year (roughly $20-30K) ...
30K at a yield of roughly 2% is $600. How do you get $2K in a UTMA/UGMA account? I use a UTMA account and haven't breached $1K yet, let alone $2K per year.
Easy. Think TGH (Tax Gain Harvesting).

A friend put $10K into an UGMA for his daughter and was thinking he would cash it in this year to pay for her freshman year in college. It was put into Vanguard S&P500 Index ca. 5 years ago and is now worth $20K. He failed to TGH each year (btw he is a certified AARP Tax Aide volunteer) and as a result his daughter will pay an unnecessary $1200 in cap gain taxes. ($2K at the child's 0% rate and $8K at the parent's top rate on LTCG of 15%).

Each year after ca. 12/20 when the last dividends and cap gain distributions are made, I sell enough appreciated shares in my kid's UGMA's at Vanguard to bring dividends and LTCG just below $2000.

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Re: UGMA/UTMA/529 for newborn

Post by pshonore » Mon Mar 24, 2014 8:21 am

dickenjb wrote:
Grt2bOutdoors wrote:
dickenjb wrote:...A child can earn up to $2000 a year in investment income TAX FREE so there is a net advantage to the family for the child to have an UGMA earning this amount each year (roughly $20-30K) ...
How much tax, if any, would a kid who had $2000 of interest pay?

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Re: UGMA/UTMA/529 for newborn

Post by sscritic » Mon Mar 24, 2014 8:24 am

$10. Plus more characters to make the minimum of 5. Edit: make that $100. I used to know how to take 10% of 1000, but apparently not this morning.

That's this year. I can't speak for 2020 as I don't know future inflation. When the standard deduction for a child with no earned income is $1200, the tax will be $8. Edit: $80.
Last edited by sscritic on Mon Mar 24, 2014 8:34 am, edited 1 time in total.

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Re: UGMA/UTMA/529 for newborn

Post by sscritic » Mon Mar 24, 2014 8:27 am

But the word can is permissive, so the child can earn $2000 and pay no tax, it's just that it can't all be interest.

[But half of it can]

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Re: UGMA/UTMA/529 for newborn

Post by pshonore » Mon Mar 24, 2014 8:28 am

Taxcaster actually says $101.

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Re: UGMA/UTMA/529 for newborn

Post by sscritic » Mon Mar 24, 2014 8:32 am

10%, 1%, what's the difference?

My bad. It's early.

It should be 10% of the $1000 excess over the standard deduction, but I think the instructions say that you have to use the tax tables and not the actual rate if your taxable income is under $100,000, so I am guessing the table gives $101 for $1000 of income.

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Re: UGMA/UTMA/529 for newborn

Post by sscritic » Mon Mar 24, 2014 8:36 am

Yup.
1,000 1,025 101

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semperlux
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Re: UGMA/UTMA/529 for newborn

Post by semperlux » Mon Mar 24, 2014 8:50 am

Still at work so gonna take some time to go through all the responses, but for the first few:

@livesoft: I also plan to tell my kid to get a job, but would also teach her how to save & budget for what she wants by her having her own account. Tax savings are definitely one of the big pluses for these accounts, so I figure, why not start one.

@dickenjb:

1. I max out all my 401k, roth, etc... ; the money going into 529 & other accounts would strictly come from left over money after retirement contributions. But thank-you for the reminder.

2. Nice, didn't know that. But I thought UGMA / UTMAs investment interest were only tax free for the first $900 or so dollars then the rest taxed at the child's tax rate (usually 10%)?

3. Was going to use Utah, but wanted to keep it simple & keep all my accounts with Vanguard. Thinking of going with Vanguard's Nevada based 529. Any criticisms on that plan?

4. True, my child will probably not qualify for any need based aid. But never hurts to plan ahead in case one of us (parents) loos our job or die.

@Grt2bOutdoors: I like your thinking haha. Of course, I hope my daughter doesn't blow the money on a car either. Maybe she can use it for her first home.

@dickenjb: in regards to tax gain harvesting, can you reinvest the money from the sales of appreciated shares back in the same fund? Or is there a wash sale rule that applies here? Thanks for pointing this trick out.....pretty cool.

@sscritic: so the $2000 cannot all be from interest income? I thought the $2000 figure specifically applied to interest income no?

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Re: UGMA/UTMA/529 for newborn

Post by pshonore » Mon Mar 24, 2014 8:53 am

first 1000 is tax free; next 1000 (and up) is taxed at child's rate. rate for Interest would be 10% , QD/LTCG would be zero.

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Re: UGMA/UTMA/529 for newborn

Post by dickenjb » Mon Mar 24, 2014 9:12 am

Wash sale rule only applies to losses, not realized gains.

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Re: UGMA/UTMA/529 for newborn

Post by Spirit Rider » Mon Mar 24, 2014 9:37 am

dickenjb wrote:2. A child can earn up to $2000 a year in investment income TAX FREE so there is a net advantage to the family for the child to have an UGMA earning this amount each year (roughly $20-30K) Note this income is tax free with no restrictions whereas earnings on a 529 are only tax free if used for QHEE. Furthermore, even the cheapest 529 plans are 3x more expensive than a Vanguard UGMA invested in VTSAX.
On investment income(2014), a child can earn only $1000 tax free, then $1000 at their own rate, then at their parents rate.

Note: the $1000 tax free is because the minimum standard deduction for a child is $1000. However, once the child's earned income + $350 exceeds $1000, that becomes the standard deduction up to the max $6200. So effectively, the tax free portion of investment income decreases a dollar for earned income until it reaches $350 and stays there. Or since deduction dollars are fungible, once you hit $1000 in unearned income any earned income is subject to tax.

So this is another reason (besides financial aid) to consider taking action with an UGMA/UTMA starting at 16/17. This action could be transfer to 529, spend down (car, "educational" trip overseas, etc...)

P.S. Only 11 states are age 18, most (39) are age 21, and while not relevant to this discussion some states allow UTMAs established by will to extend age to 25.
Last edited by Spirit Rider on Mon Mar 24, 2014 9:59 am, edited 1 time in total.

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Re: UGMA/UTMA/529 for newborn

Post by dickenjb » Mon Mar 24, 2014 9:40 am

PS I am working on a wiki entry on the so called "Kiddie Tax", hope to have it complete in the next few weeks. Somewhat intimidated by the wiki editing.

It is not as straightforward as you might think, especially when the child starts working a summer job. Now the standard deduction becomes $350 + earned income, rather than $1000. So then they can only earn $350 of interest and non QDI. Most of what VTSAX throws off is QDI so no worries for my kids.

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Re: UGMA/UTMA/529 for newborn

Post by dickenjb » Mon Mar 24, 2014 9:43 am

On investment income(2014), a child can earn only $1000 tax free, then $1000 at their own rate, then at their parents rate.


Yes. For LTCG and QDI, the child's rate is 0%, so what I said is correct. I did not say the $2000 was untaxed, I said it was tax free. $1000 untaxed and $1000 taxed at 0% is tax free, but not untaxed.

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Re: UGMA/UTMA/529 for newborn

Post by sscritic » Mon Mar 24, 2014 9:57 am

dickenjb wrote: Yes. For LTCG and QDI, the child's rate is 0%, so what I said is correct. I did not say the $2000 was untaxed, I said it was tax free. $1000 untaxed and $1000 taxed at 0% is tax free, but not untaxed.
But only if you define interest as not investment income. Your can makes your previous statement correct, but can is not the same as can always. This was pshonore's point. A child can be taxed $0 on $2000 of investment income, a child can be taxed $101 on $2000 of investment income or the child can be taxed 1 2, 4, 6, 9, 11, 14, 16, 19, 21, 24, 26, 29, 31, 34, 36, 39, 41, ... (alternating jumps of 2 and 3), and 99.

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Re: UGMA/UTMA/529 for newborn

Post by dickenjb » Mon Mar 24, 2014 3:02 pm

sscritic wrote:But only if you define interest as not investment income. Your can makes your previous statement correct, but can is not the same as can always. This was pshonore's point. A child can be taxed $0 on $2000 of investment income, a child can be taxed $101 on $2000 of investment income or the child can be taxed 1 2, 4, 6, 9, 11, 14, 16, 19, 21, 24, 26, 29, 31, 34, 36, 39, 41, ... (alternating jumps of 2 and 3), and 99.
Right. I said, "can", not "can always".

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Re: UGMA/UTMA/529 for newborn

Post by Hub » Wed Jul 16, 2014 10:06 am

Just a thought regarding a UTMA account for a newborn, my dad established one for each of my kids at birth. Once they have earned income I'm thinking I may dollar for dollar their UTMA money into Roth IRAs. This shelters it from FAFSA calculations. The Roth contributions could still be used for education expenses if needed. Planning to tax gain harvest along the way also.

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Re: UGMA/UTMA/529 for newborn

Post by sdiloreto » Thu May 04, 2017 12:41 pm

Hello. I am new to this website and I know this is an old thread. Bear with me....
I have four children and all of them have UTMA accounts with appreciated funds.
I know three of them won't be earning W2 money this year so I sold enough shared to have less than $2100 in unearned income (Qualified Dividends). These means I will pay zero in taxes for the three of them. I understand this is called Tax Gain Harvesting. I will then reinvest that cash in VTSAX for example.
The main question is with my older one that will be working during the summer and making less than $3000 in 2017. Can someone explain me how much unearned income can I realize in this case? Thank you in advance.

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Re: UGMA/UTMA/529 for newborn

Post by CyclingDuo » Fri May 05, 2017 8:07 am

sdiloreto wrote:Hello. I am new to this website and I know this is an old thread. Bear with me....
I have four children and all of them have UTMA accounts with appreciated funds.
I know three of them won't be earning W2 money this year so I sold enough shared to have less than $2100 in unearned income (Qualified Dividends). These means I will pay zero in taxes for the three of them. I understand this is called Tax Gain Harvesting. I will then reinvest that cash in VTSAX for example.
The main question is with my older one that will be working during the summer and making less than $3000 in 2017. Can someone explain me how much unearned income can I realize in this case? Thank you in advance.
2015 (2016-2017 are similar)

Earned and Unearned Income

If a child has both earned and unearned income, he or she must file a return (2016 and 2015) if:
unearned income was over $1,050
earned income was over $6,300, or
earned and unearned income together total more than the larger of (1) $1,050, or (2) total earned income (up to $6,300) plus $350.

http://www.nolo.com/legal-encyclopedia/ ... eturn.html

https://www.irs.gov/taxtopics/tc553.html

https://ttlc.intuit.com/questions/19006 ... kiddie-tax

You can run the worksheet here to combine the earned and unearned incomes (although it is for preparing a 2016 return, we can assume that 2017 won't be too drastically different):

https://www.irs.gov/pub/irs-pdf/p929.pdf

Or if you have turbo tax, just plug in the numbers to get an idea of what the 2016 numbers would be. 2017 will be fairly similar at this point.
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