UTMA v. 529 in no-tax state

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Topic Author
Cash
Posts: 1459
Joined: Wed Mar 10, 2010 10:52 am

UTMA v. 529 in no-tax state

Post by Cash » Sun Nov 10, 2019 9:36 pm

Am I analyzing this UTMA v. 529 situation properly? Assume the following:

-We want to superfund a college fund with $100k.
-One child, currently 1 year old. No plans for a second child.
-We live in Florida, so no tax break for contributing to a 529, just tax-free growth.
-In Florida, a UTMA can be designated to age 25.
-Not worried about a 25 year old getting full access to the money. In fact, it's probably a good test to see how the child will handle it before a much larger inheritance.
-Not going to get financial aid, so not concerned about the impact of any account on that.

529:
-Superfund and then forget about it until time for college.
-Use the money for educational expenses.
-Under certain other circumstances (e.g., scholarship), you can withdraw the money without penalty, but otherwise, the money has to stay.
-You can designate a different beneficiary at any time.
-If not all of the money is used for the child, the 529 can become sort of an education trust for future generations.

UTMA:
-$100k in VTI at current 1.84% dividend yield = $1,084 in dividends. Current qualified dividend estimate = 95.97%, so qualified dividends = $1,040; non-qualified dividends = $44
-First $2100 in unearned income is tax free
-Up to $4850 in capital gains is tax free
-In this case, $4850-1084 = $3766 in gains could be harvested tax free
-At the current yield, it would take approximately $263k of VTI to reach the tax-free threshold
-Money in a UTMA account can be transferred to a UTMA 529 if tax-free space becomes an issue
-Money in the UTMA account can be used for college, house downpayment, and other things for the child's benefit

Please correct me if any of the above is incorrect. Seems like UTMA wins, up to a certain amount, as long as you are willing the gains harvest, don't care about financial aid, and aren't worried about your future 25-year-old (and even if you later become worried about the 25-year-old, you can take steps prior to his/her reaching that age to reduce the windfall).

Grt2bOutdoors
Posts: 21386
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: UTMA v. 529 in no-tax state

Post by Grt2bOutdoors » Mon Nov 11, 2019 9:05 am

Cash wrote:
Sun Nov 10, 2019 9:36 pm
Am I analyzing this UTMA v. 529 situation properly? Assume the following:

-We want to superfund a college fund with $100k.
-One child, currently 1 year old. No plans for a second child.
-We live in Florida, so no tax break for contributing to a 529, just tax-free growth.
-In Florida, a UTMA can be designated to age 25.
-Not worried about a 25 year old getting full access to the money. In fact, it's probably a good test to see how the child will handle it before a much larger inheritance.
-Not going to get financial aid, so not concerned about the impact of any account on that.

529:
-Superfund and then forget about it until time for college.
-Use the money for educational expenses.
-Under certain other circumstances (e.g., scholarship), you can withdraw the money without penalty, but otherwise, the money has to stay.
-You can designate a different beneficiary at any time.
-If not all of the money is used for the child, the 529 can become sort of an education trust for future generations.

UTMA:
-$100k in VTI at current 1.84% dividend yield = $1,084 in dividends. Current qualified dividend estimate = 95.97%, so qualified dividends = $1,040; non-qualified dividends = $44
-First $2100 in unearned income is tax free
-Up to $4850 in capital gains is tax free
-In this case, $4850-1084 = $3766 in gains could be harvested tax free
-At the current yield, it would take approximately $263k of VTI to reach the tax-free threshold
-Money in a UTMA account can be transferred to a UTMA 529 if tax-free space becomes an issue
-Money in the UTMA account can be used for college, house downpayment, and other things for the child's benefit

Please correct me if any of the above is incorrect. Seems like UTMA wins, up to a certain amount, as long as you are willing the gains harvest, don't care about financial aid, and aren't worried about your future 25-year-old (and even if you later become worried about the 25-year-old, you can take steps prior to his/her reaching that age to reduce the windfall).
You aren't going to be able to tax harvest all of the gains with no income tax liability if the UTMA account grows to say $100K or even say $50K. This year the market is up close to 25%, if the account is valued at $50K your unrealized gains are what? $12,500 and your income is what $1,000? That's $13,500 less $4,850 this year, still leaves you with a pile of un harvested gains. The 529 plan on the other hand, if truly used for educational purposes provides you with a truly tax free redemption on gains, irrespective of if your home state gives you an upfront tax break or not. Understand this, an UTMA, the money placed in the account is a completed gift, the child owns the money. A 529 plan, if not registered as an UTMA 529, the money is owned by you, you designate the beneficiary and can change it at any time. If I were doing it, I'd superfund the 529 plan to $75K, place the other $25K in the UTMA.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: UTMA v. 529 in no-tax state

Post by Spirit Rider » Mon Nov 11, 2019 9:55 am

Cash wrote:
Sun Nov 10, 2019 9:36 pm
-In Florida, a UTMA can be designated to age 25.
-Not worried about a 25 year old getting full access to the money. In fact, it's probably a good test to see how the child will handle it before a much larger inheritance.
The custodian of a Florida UTMA with a termination age of 25, must formally notify the account owner at age 21 that they can elect to assume ownership. The account owner then has a 30-day window to do so.

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Wiggums
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Re: UTMA v. 529 in no-tax state

Post by Wiggums » Mon Nov 11, 2019 10:06 am

We have UTMA accounts. The best part is that the money can be used for anything that benefits the child. The downside, as pointed out already, is the tax implication 1) the kiddie tax when the child has too much taxable gains, which also hits the parents return and 2) the tax when shares are sold.

If I could do it again, I would go with the 529. Since there are no siblings to pass any excess to, you can do a combination of 529 and UTMA.

Spirit Rider
Posts: 11769
Joined: Fri Mar 02, 2007 2:39 pm

Re: UTMA v. 529 in no-tax state

Post by Spirit Rider » Mon Nov 11, 2019 10:34 am

Wiggums wrote:
Mon Nov 11, 2019 10:06 am
We have UTMA accounts. The best part is that the money can be used for anything that benefits the child. The downside, as pointed out already, is the tax implication 1) the kiddie tax when the child has too much taxable gains, which also hits the parents return and 2) the tax when shares are sold.

If I could do it again, I would go with the 529. Since there are no siblings to pass any excess to, you can do a combination of 529 and UTMA.
Effective 1/1/2018 with the TCJA, unearned income > $2200 (2019) is no longer taxed at the parents marginal rates. It is now subject to the trust tax brackets. Except for very large UTMA accounts of parents with modest taxable incomes, this is far more favorable.

niceguy7376
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Location: Metro ATL

Re: UTMA v. 529 in no-tax state

Post by niceguy7376 » Mon Nov 11, 2019 12:08 pm

Cash wrote:
Sun Nov 10, 2019 9:36 pm
Am I analyzing this UTMA v. 529 situation properly? Assume the following:

-We want to superfund a college fund with $100k.
-One child, currently 1 year old. No plans for a second child.
-We live in Florida, so no tax break for contributing to a 529, just tax-free growth.
Having the option of prepaid college change anything?
In FL, for a one year old, you can drop 60K now to get guaranteed 4 years at premier universities of florida.
https://www.myfloridaprepaid.com/prepai ... -pricing/#

Topic Author
Cash
Posts: 1459
Joined: Wed Mar 10, 2010 10:52 am

Re: UTMA v. 529 in no-tax state

Post by Cash » Tue Nov 12, 2019 6:19 am

Grt2bOutdoors wrote:
Mon Nov 11, 2019 9:05 am
You aren't going to be able to tax harvest all of the gains with no income tax liability if the UTMA account grows to say $100K or even say $50K. This year the market is up close to 25%, if the account is valued at $50K your unrealized gains are what? $12,500 and your income is what $1,000? That's $13,500 less $4,850 this year, still leaves you with a pile of un harvested gains. The 529 plan on the other hand, if truly used for educational purposes provides you with a truly tax free redemption on gains, irrespective of if your home state gives you an upfront tax break or not. Understand this, an UTMA, the money placed in the account is a completed gift, the child owns the money. A 529 plan, if not registered as an UTMA 529, the money is owned by you, you designate the beneficiary and can change it at any time. If I were doing it, I'd superfund the 529 plan to $75K, place the other $25K in the UTMA.
Presumably the account isn't going to grow by 25% every year, so (if I'm understanding gains harvesting correctly) some future years should allow you to harvest some past years' gains. Nevertheless, I take your point about the account becoming unwieldy at some point, at least for it to remain tax-free.

Topic Author
Cash
Posts: 1459
Joined: Wed Mar 10, 2010 10:52 am

Re: UTMA v. 529 in no-tax state

Post by Cash » Tue Nov 12, 2019 6:20 am

Spirit Rider wrote:
Mon Nov 11, 2019 9:55 am
Cash wrote:
Sun Nov 10, 2019 9:36 pm
-In Florida, a UTMA can be designated to age 25.
-Not worried about a 25 year old getting full access to the money. In fact, it's probably a good test to see how the child will handle it before a much larger inheritance.
The custodian of a Florida UTMA with a termination age of 25, must formally notify the account owner at age 21 that they can elect to assume ownership. The account owner then has a 30-day window to do so.
Thanks for clarifying. I read that and it doesn't bother me either.

Topic Author
Cash
Posts: 1459
Joined: Wed Mar 10, 2010 10:52 am

Re: UTMA v. 529 in no-tax state

Post by Cash » Tue Nov 12, 2019 6:24 am

niceguy7376 wrote:
Mon Nov 11, 2019 12:08 pm
Cash wrote:
Sun Nov 10, 2019 9:36 pm
Am I analyzing this UTMA v. 529 situation properly? Assume the following:

-We want to superfund a college fund with $100k.
-One child, currently 1 year old. No plans for a second child.
-We live in Florida, so no tax break for contributing to a 529, just tax-free growth.
Having the option of prepaid college change anything?
In FL, for a one year old, you can drop 60K now to get guaranteed 4 years at premier universities of florida.
https://www.myfloridaprepaid.com/prepai ... -pricing/#
We thought about that. But I'm not sure that it's really that great of a deal. I could put the same $60k in a 529/UTMA and probably end up better off. No guarantee of that, of course, which is what the prepaid plan offers. But I'm willing to take the risk.

mike_in_ny
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Re: UTMA v. 529 in no-tax state

Post by mike_in_ny » Tue Nov 12, 2019 7:03 am

My suggestion, being 18 years ahead of you, is the 529. You will likely have plenty of
taxable money in various forms when he/she hits college age.

The 529 truly is a tax wonder and not having to deal with dividends or growing cap gains
makes it easy through time. I will admit now that I'm in withdrawal, some of it is a little
cumbersome (off campus housing, meal plans, etc.) but very manageable. I will also
likely have a considerable amount remaining due to scholarships that I'll (gladly) need to
figure out what to do with if advanced degrees are not in the offering.

Topic Author
Cash
Posts: 1459
Joined: Wed Mar 10, 2010 10:52 am

Re: UTMA v. 529 in no-tax state

Post by Cash » Tue Nov 12, 2019 10:18 pm

mike_in_ny wrote:
Tue Nov 12, 2019 7:03 am
I will also
likely have a considerable amount remaining due to scholarships that I'll (gladly) need to
figure out what to do with if advanced degrees are not in the offering.
This is what I’m trying to avoid, but maybe the UTMA is too much of a hassle.

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