Author Topic: UTMA/UGMA -vs- separate nonretirement account in Parent's names?  (Read 796 times)

BuffaloStache

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*Before I start, I am aware that there are dozens of similar topics in this area. However, I have not seen my specific questions answered, so I figured I'd start a new topic*

What are forum members thoughts on opening a UTMA/UGMA for their kids, or just opening a separate Vanguard (or other) taxable nonretirement account in my/my-wife's names and earmarking it for our children? What are the pro's and con's to each approach?

Also, I'm *NOT* talking about 529 accounts. Click the spoiler link if you want the long version of that.
Spoiler: show
We are very fortunate/lucky that we have already opened 529 accounts for both of our kids, contribute regularly to them, but still have extra funds we would like to invest for them and/or have received as gifts from family members. We aren't talking about enough money to make them FI before they even start working or anything, but more money than I feel comfortable sitting in a savings account for them (and slightly above the minimums needed to open Vanguard accounts/etc.). My thoughts are that these funds can sit in investments for 18+ years, and then help them out for house downpayments, weddings, any extra college expenses the 529's don't cover, etc., etc. as life happens.


Our kids are still very young so I view this as a great opportunity to take advantage of compounding (and could be an awesome compounding lesson for them when they are starting their adult lives). If we do open taxable nonretirements accounts now for them, can we transfer them to UTMA/UGMA accounts at a later time? Does anyone know if there are any large tax implications of making that transfer?

Any thoughts, advice, or personal experiences with either option (UTMA/UGMA accounts or parental-owned earmarked taxable nonretirement accounts) or any potential transfers (going from taxable nonretirement to UTMA/UGMA accounts, or other transfer strategies when they get older) would be greatly appreciated. I feel like I'm burning a whole in our collective family pockets right now with those funds sitting in low-interest savings accounts...
« Last Edit: May 09, 2021, 05:27:14 PM by BuffaloStache »

Tyler durden

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Re: UTMA/UGMA -vs- separate nonretirement account in Parent's names?
« Reply #1 on: May 10, 2021, 11:40:12 AM »
UTMA and UGMA accounts work against the kids in terms of the EFC. The amount the family is supposed to pay for college. Any money in the kids name works against you for this. That is the reason my wife and I decided against it. Someone might know more on the details but I would look into that before taking the plunge.

Instead we opened up a regular investing account. Doing the simple index/ETF thing, and we just labeled it "kids savings". Its in our names but just have it listed that way to track it. We now add 2 times as much to the brokerage account, than we do the 529s.

secondcor521

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Re: UTMA/UGMA -vs- separate nonretirement account in Parent's names?
« Reply #2 on: May 10, 2021, 12:12:33 PM »
Yes, you can transfer money from a taxable non-retirement account in your names into a UTMA/UGMA account for your kids.  Any amounts transferred in a single year over the annual gift exclusion amount would require filing a gift tax return and would eat into your lifetime unified exemption amount.  If you ended up filing a gift tax return, you or your executor in theory should keep track of that for after you die and accounting for that properly, which I think is a pain.  Since it sounds like you're married, that would be $30K per year per kid ($15K from you, $15K from your spouse to each kid per year), so probably not an issue if you're careful about the transferring.

Money transferred into a UTMA (almost all states are UTMA now, BTW, IIRC; UGMA was an older law) becomes the kids' money and spendable by them on whatever at age 21 (or younger in some states).  You can't legally, therefore, take money out of a kid's UTMA account and spend it on yourselves (like pay your electric bill or buy yourself a car).

Whomever's name is on the account is where the income will be taxed.  You should be aware of the "kiddie tax", which prevents high income parents from storing money in their kids' names to get lower tax rates on the income.  What happens is any unearned income of the kid is taxed at the parent's rate after I believe the first $2,200.

As Tyler Durden says correctly above, money in the kids' names is more heavily "FAFSA taxed" if they go to a FAFSA-based university (most are FAFSA except some select liberal arts and select "famous" schools).

EricEng

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Re: UTMA/UGMA -vs- separate nonretirement account in Parent's names?
« Reply #3 on: May 10, 2021, 12:34:52 PM »
Money transferred into a UTMA (almost all states are UTMA now, BTW, IIRC; UGMA was an older law) becomes the kids' money and spendable by them on whatever at age 21 (or younger in some states).  You can't legally, therefore, take money out of a kid's UTMA account and spend it on yourselves (like pay your electric bill or buy yourself a car).

Whomever's name is on the account is where the income will be taxed.  You should be aware of the "kiddie tax", which prevents high income parents from storing money in their kids' names to get lower tax rates on the income.  What happens is any unearned income of the kid is taxed at the parent's rate after I believe the first $2,200.
Money you transfer to the UTMA can be used to cover the child's expenses and care.  You can use it to pay an electric bill for where the child is residing and even justify a family car to provide transportation for the child.  There's so much wiggle room in this and no oversight that you really don't have to worry about taking money back out.

You will have to file a tax return in their name for their capital gains, but it is a nice way to avoid tax on $2,200 fed cap gains per yer per child.  I transfer enough my highest gainer stocks to their UTMAs to liquidate $2,200 in gains.  Just don't go over that $2,200 in a year (watch out for dividends and yields) as it jumps in tax fast!

BuffaloStache

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Re: UTMA/UGMA -vs- separate nonretirement account in Parent's names?
« Reply #4 on: May 10, 2021, 03:39:22 PM »
Thanks for the feedback and info, everyone. It looks like I'm leaning towards a similar solution as Tyler Durden

...
Instead we opened up a regular investing account. Doing the simple index/ETF thing, and we just labeled it "kids savings". Its in our names but just have it listed that way to track it....

With the thought that if I want to make any changes down the road, I can just do it ~$30k/kid/year at a time to make sure I stay below the gift tax threshold. Yes, it means I'll have to do some more planning ahead, but it seems like the simplest path forward right now. 

Hadilly

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Re: UTMA/UGMA -vs- separate nonretirement account in Parent's names?
« Reply #5 on: May 10, 2021, 06:57:34 PM »
I set up accounts for each of my three kids. Hereís why, and my caveat. I wanted to normalize investing, any money the kids add, we match 100%. I donít expect my children to receive any financial aid for college and I wanted to take advantage of time and compound interest.

My lower income sibling decided against a custodial account and set up a taxable account with the intent it be for their child but it remains accessible if needed by the parents.

BuffaloStache

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Re: UTMA/UGMA -vs- separate nonretirement account in Parent's names?
« Reply #6 on: May 12, 2021, 07:11:15 AM »
I set up accounts for each of my three kids....

@Hadilly , do you mean UTMA/UGMA accounts, or a different type? It's unclear from your post.

Hadilly

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Re: UTMA/UGMA -vs- separate nonretirement account in Parent's names?
« Reply #7 on: May 12, 2021, 07:56:25 AM »
Sorry about that, I have UTMA brokerage accounts set up through Vanguard.

I am also starting Roth accounts for the kids, requiring them to track the money they make from odd jobs, etc. That will have to go into ETFs because they donít earn enough to hit the 3k minimum for index funds at vanguard.