Author Topic: Best place to set up UTMA/UGMA accounts?  (Read 5058 times)

Luthien

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Best place to set up UTMA/UGMA accounts?
« on: April 08, 2015, 08:53:57 AM »
My mom has gifted us $1000 to establish savings accounts for college for each of our kids. My husband and I don't want to go the traditional 529 route, as we aren't sure our kids will need or want to attend college to be successful. Also, our kids might have full scholarships to college (my husband and I both did), and they might not need money for college, but they might need money for a car, or a downpayment on a house, or who knows what. I'm looking at establishing UTMA/UGMA accounts for them. Based on the research I've done, the money would be in their name until they came of age, and then they could spend it on whatever they want. Also, it looks like the first $1000 of income in these accounts each year is tax-free. Since my husband and I aren't planning on contributing additional money to these accounts, I doubt they will reach the point where they are earning that much.

Question: Where is the best place to set up an account like this? I need a place with a $1000 minimum investment or lower, and a good choice of index funds to invest it in. Vanguard? Fidelity? Has anyone here ever set up an account like this that can advise us? Thanks so much!

MDM

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Re: Best place to set up UTMA/UGMA accounts?
« Reply #1 on: April 08, 2015, 11:54:36 AM »
Question: Where is the best place to set up an account like this? I need a place with a $1000 minimum investment or lower, and a good choice of index funds to invest it in. Vanguard? Fidelity? Has anyone here ever set up an account like this that can advise us? Thanks so much!
https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma might be helpful.

AH013

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Re: Best place to set up UTMA/UGMA accounts?
« Reply #2 on: April 08, 2015, 12:45:21 PM »
some cautions before going down this route
  • You mentioned expected scholarship.  If these are in any part need-based versus merit-based, note that financial aid generally assumes 100% of money in a child's name will be spent on tuition for a 4 year degree, whereas only a smaller amount of parental assets (~10%) will be spent on a child's tuition.  So basically every $1 in the UTMA detracts $1 from any potential financial aid, which is a huge disincentive to use it as a college savings vehicle.
  • As you noted, UGMA/UTMA money can be spent by the child on ANYTHING they see fit when they come of age (usually 18 or 21 depending on state).  A friend of mine had parents that established UTMAs for their kid's college fund before 529s were a thing.  Everything went well until senior year for one of the kids.  The remaining money (~$25k?) in that kid's UTMA earmarked for 4th year college tuition proved too tempting, and since the kid had turned 21 over the summer the child took legal control and it was blown on gambling & drugs.  Imagine the heartbreak for both child & family that could have been avoided.  It took YEARS for the kid to mature and resave the tuition money to finish their degree.

Just a few thoughts on the matter
529s -- Money doesn't necessarily need to be spent on college tuition.  A host of educational training is eligible for approved spending.  The main benefit of the account is no income taxes on gains.  If your kids get scholarships, you can withdraw the money penalty free (although you will pay taxes on gains).  If they don't go to college, you can still withdraw the money with a 10% penalty on gains, but due to compounding and deferred taxes you may still have more money after taxes and penalties if the account compounds for ~10-15 years than if those gains occurred outside the 529 even without penalty.  If the 529 is set up in your mother's name for your kids (her grand-kids) benefit, the money has 0% impact on financial aid.  Plus you get a state tax deduction in Wisconsin for contributions.

Money held in your name that you've earmarked in a separate account for your kids -- yeah, you lose out on preferential treatment of the first $1,000 in income.  With a $1,000 account, you'll be lucky if you see $100 in long term gains a year, which would have you seeing $0-$20 a year in income taxes depending on your tax bracket.  The upside is you have total control of how the money is spent.  Kid wants new car rims, or to go to mexico for a boozefest with friends, or buy a fancy wardrobe?  NOPE!  Is saving $0-$20 worth the risk that the money your mom wants to help them improve their life is squandered by a potential moment of immaturity?