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UTMA investment

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  • Avatar mlc7 
    Participant
    Status: Physician
    Posts: 24
    Joined: 02/18/2018

    We have UTMA account opened for my child, age 10 and invested in VTSAX.  The intent of the money is to use it during college years or beyond. I was wondering should we buy a bond index fund considering the economic concerns? What would you recommend for an investment portfolio and what are the tax consequences of selling VTSAX and buying lets say VBTLX?

    Thank you.

    #239432 Reply
    Avatar DCdoc 
    Participant
    Status: Physician
    Posts: 562
    Joined: 06/14/2016

    I won’t comment on you AA or desire to change to bonds. But the tax consequences of selling in a UTMS depend on your basis and the amount. Tax GAIN harvesting often makes sense since the first couple thousand of gains in a UTMA are tax free. You can essentially harvest some gains tax free and increase the basis by rebuying. If you have a gain that exceeds the limits it’s taxed at estate/trust rates after the trump tax law and no longer taxes at parental rate, which is very nice.

    #239436 Reply
    Liked by mlc7
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8142
    Joined: 01/09/2016

    There are always economic concerns. Unless you will absolutely have to use the $$ within 5 years, forget that argument. Most physician families can plan around down markets, though.

    @dcdoc is correct that there are some definite benefits to tax gain harvesting, as @spiritrider pointed out to me in this recent response. However, the estate/trust rates are not quite so friendly, TCJA notwithstanding. Trust rates are 37% on trust income > $12,750. For parents filing MFJ, they don’t go to 37% until income is > $600k ($500k for S).

    This post might be helpful:

    How to Stack Education Savings

     

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #239445 Reply
    Liked by mlc7
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 707
    Joined: 06/18/2018

    “I was wondering should we buy a bond index fund considering the economic concerns”

    So, you intend this money to be used 8 or more years from now (current 10yo, college or beyond use)…which do you think will provide the best total return from today until you intend to pull money out 8 years from now?

    Are you frantically buying bonds in your own retirement accounts?

    #239453 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1910
    Joined: 02/01/2016

    @dcdoc is correct that there are some definite benefits to tax gain harvesting, as @spiritrider pointed out to me in this recent response. However, the estate/trust rates are not quite so friendly, TCJA notwithstanding. Trust rates are 37% on trust income > $12,750. For parents filing MFJ, they don’t go to 37% until income is > $600k ($500k for S).

    While you are correct about the compressed trust tax brackets. The 37% ordinary income tax bracket would hardly ever be reached with UTMA accounts. The custodian should use optimal investments and tax management to minimize oridinary income in a UTMA account.

    • A UTMA custodian should use a 100% allocation to VTSAX. No capital gains distributions and little to no reported Qualified DIVidends.
    • A UTMA custodian should always use tax gain harvesting up to the top of the first trust QDIV/LTCG bracket (2019 = ($2,200 + $2650 = $4,850)). These would be subject to a 0% QDIV/LTCG rate.
    • A UTMA custodian could use tax gain harvesting to the top of the second trust QDIV/LTCG bracket (2019 = ($2,200 + $12,950 = $15,150)). The first $4850 would be subject to a 0% QDIV/LTCG rate and the next $10,300 would be subject to a 15% QDIV/LTCG rate.
    • Since VTSAX historically reports little to no non-qualified dividends. You would need mid seven figure$ before you were even out of the 10% ordinary income tax brackets.
    • In today’s interest rate environment, even invested 100% in fixed income, you would need mid six figure$ to hit the 37% trust ordinary income tax bracket.
    #239477 Reply
    Liked by mlc7
    Avatar HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 209
    Joined: 12/28/2016

    What is the preferred brokerage to open UTMA accounts? Thanks.

    #239481 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1910
    Joined: 02/01/2016

    As I stated from a “Kiddie Tax” tax perspective you want to hold either VTSAX, VTI or a another TSM ETF with similar tax advantages. I believe there is no longer anywhere you can buy VTSAX or VTI transaction free except at Vanguard.

    #239507 Reply
    Liked by mlc7
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2382
    Joined: 03/01/2018

    ^^^ free at E*TRADE

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #239509 Reply
    Liked by Peds
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1910
    Joined: 02/01/2016

    I didn’t realize that Etrade had added them back to their commission free list.

    #239511 Reply
    Avatar HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 209
    Joined: 12/28/2016

    Thanks for the info. Appreciate the tax gain harvesting math.

    #239524 Reply

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