SecondCor521
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Background: I have three kids, age 12, 7, and 5, and I plan to pay for four years of tuition/room/board/books for each of them. Each kid has three accounts which contain their college money -- a 529, a UTMA, and an ESA. If my math is right, the 12 year old and the 7 year old are now fully funded. The 5 year old still needs an additional $5K worth of funding in today's dollars.
I am considering the following action:
1. Sell from their UTMA accounts in December. This will realize some capital gains, which, as I understand it, will be taxed at 5% if I keep the gains under $1700 per child.
2. Take the proceeds and reinvest in the 529 plans and the ESA's in January. I get a state tax deduction for a max of $4k of the 529 contributions. My state marginal rate is 7.8%.
This seems to be a no-brainer for the first $4k I do this with because of the tax deduction. Anything above that number, I am voluntarily paying some capital gains now. Paying these capital gains reduces the amount that my kids have access to when they reach the age of majority on the off chance they decide to blow it on a Mustang or something. It also moves the money into accounts that are more easily transferable between the three kids as opposed to money that is specifically for a specific child. Finally, if I repeated this trick yearly I could probably drain their UTMA accounts and simplify my life a little with just six college accounts instead of nine.
I am cautious because in general I have a bias for deferring paying taxes. I am also curious if I am overlooking anything.
I understand that withdrawals from UTMA accounts need to be for the benefit of the children. I believe that my child support payments qualify under the law for this purpose; my state child support guidelines written by my state supreme court explicitly state at one point that the child support payments are for the benefit of the children. Therefore I would be able to withdraw the equivalent of up to four months worth of child support payments from each UTMA (12 months in 2007 / 3 kids). In actuality I am paying the child support payments out of current cash flow, but I believe this meets the letter and spirit of the law. I know some will disagree that UTMA account assets cannot be used for basic support needs but I have researched this point as well and believe this is not the case.
Feedback welcome, both on the UTMA legality aspect as well as the wisdom or foolishness of the overall idea.
2Cor521
I am considering the following action:
1. Sell from their UTMA accounts in December. This will realize some capital gains, which, as I understand it, will be taxed at 5% if I keep the gains under $1700 per child.
2. Take the proceeds and reinvest in the 529 plans and the ESA's in January. I get a state tax deduction for a max of $4k of the 529 contributions. My state marginal rate is 7.8%.
This seems to be a no-brainer for the first $4k I do this with because of the tax deduction. Anything above that number, I am voluntarily paying some capital gains now. Paying these capital gains reduces the amount that my kids have access to when they reach the age of majority on the off chance they decide to blow it on a Mustang or something. It also moves the money into accounts that are more easily transferable between the three kids as opposed to money that is specifically for a specific child. Finally, if I repeated this trick yearly I could probably drain their UTMA accounts and simplify my life a little with just six college accounts instead of nine.
I am cautious because in general I have a bias for deferring paying taxes. I am also curious if I am overlooking anything.
I understand that withdrawals from UTMA accounts need to be for the benefit of the children. I believe that my child support payments qualify under the law for this purpose; my state child support guidelines written by my state supreme court explicitly state at one point that the child support payments are for the benefit of the children. Therefore I would be able to withdraw the equivalent of up to four months worth of child support payments from each UTMA (12 months in 2007 / 3 kids). In actuality I am paying the child support payments out of current cash flow, but I believe this meets the letter and spirit of the law. I know some will disagree that UTMA account assets cannot be used for basic support needs but I have researched this point as well and believe this is not the case.
Feedback welcome, both on the UTMA legality aspect as well as the wisdom or foolishness of the overall idea.
2Cor521