TeeOneThreeParticipantStatus: Other ProfessionalPosts: 2Joined: 08/07/2019
I just had a son and am looking to start investing for his future. I have already opened a 529 account, but I’m looking to also invest some money that he can use if for whatever reason he decides not to go to college or gets a substantial scholarship. I have been reading about UGMA and UTMA accounts. What I am wondering is what are the benefits or drawbacks of opening a UGMA account vs opening a traditional Vanguard Brokerage account? I understand he is a minor and can’t have his own brokerage account. I am considering opening my own and gifting him the proceeds in the future. Any insight would be appreciated!August 7, 2019 at 4:10 pm MST #237107jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 8134Joined: 01/09/2016
Congratulations! Downside of the UTMA is that your son gets the account at age 18 to do with whatever he wishes, which may or may not coincide with your plans.
Downsides of the brokerage account are that:
- you will pay taxes on the income over the years (same on the UTMA above certain thresholds, so this is not really a consideration), and
- if you decide to give it to him later, you’re probably going to be dealing with a gift tax situation.
Personally, I would prob go with the brokerage given the amounts I am presuming you are considering.
Of course, another option for a decent-sized sum of money is a trust, which solves both the control and the gifting issues. The setup and administration is, otoh, more complex (read, more expensive). You will have to balance priorities and outcomes.spiritriderParticipantStatus: Small Business OwnerPosts: 1907Joined: 02/01/2016
I have a different take on this than @jfoxcpacfp.
Only South Dakota and the lone UGMA holdout state South Carolina still limit age of termination to 18.. Forty states allow you to set the age of termination at or up to age 21 and eight states allow up to 25.
If you invest in tax efficient mutual funds and practice tax gain harvesting every year there are gains for that fund. The UTMA account holder can have little to no tax liability up to and including receiving control of the account.
In 2019, as long as income subject to ordinary income taxes (interest, NQDIV) is < the $1100 unearned income standard deduction with no earned income and the total unearned income including QDIV/LTCG is < $4850. There will be $0 in Kiddie Taxes due. Earned income may reduce the effective unearned income standard deduction to $350 or less once you approach the total taxable income standard deduction ($12,200).jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 8134Joined: 01/09/2016Only South Dakota and the lone UGMA holdout state South Carolina still limit age of termination to 18.. Forty states allow you to set the age of termination at or up to age 21 and eight states allow up to 25.Click to expand…
Who ARE you?!? And how do you have all this knowledge? That’s the first time I’ve heard that – thanks for the info!
As you may or may not know, I’m not a fan of TLH, but I’m in a marked minority on this forum.spiritriderParticipantStatus: Small Business OwnerPosts: 1907Joined: 02/01/2016
I am not referring to tax “loss” harvesting. I am referring to tax “gain” harvesting.
This is the practice of selling appreciated securities in a year you have long term capital gains. You have then “realized” those LTCG gains. This especially beneficial in a year to the degree you are in a 0% QDIV/LTCG bracket.
This resets the cost basis of appreciated securities. Techically, there is no IRS holding period restriction like there is with TLH. You could sell a secutity and immediately re-buy it.
However, most mutual fund companies have a 30-day round-trip restriction. E.g. Fidelity limits you to one round-trip per 90 days. Since STCG are subject to ordinary income taxes, this still allows you to have up to a four fund portfolio or use ETFs.
I recommend holding just total stock market in a UTMA. You can add total international if that is your preference. Total bond distributions that result along with the other fund(s) in ordinary income > the unearned income standard deduction will be taxable.
Every UTMA custodian should be doing TGH up to the top of the Kiddie Tax 0% QDIV/LTCG bracket every year. Note: You want to be sure you are generating LTCG by waiting a year and a day.jfoxcpacfpModeratorStatus: Financial Advisor, Accountant, Small Business OwnerPosts: 8134Joined: 01/09/2016
Of course, I see what you’re saying and didn’t read your answer carefully enough. TU!August 8, 2019 at 6:35 am MST #237265