UTMA asset reallocation ?

[Lazyfabs]

we currently have 2 UTMA accounts w/ balances of ~$20k, one for each child. currently, the money is invested 100% in S&P 500 index funds. we contribute $25 to each account twice a month. we also invest occasionally any gift they might get from grandparents.

of the ~$20k, about ~$12k will hit LTG status in the next week. subsequently, there are multiple small lots that will flip to LTG on a bi-weekly basis and any gifts deposited over the next year. none of the lots have losses.

we were thinking of switching from the S&P 500 to a Total Stock Market Index fund. mostly to broaden the diversity a bit, capture the whole market, etc. we are fine w/ keeping it in S&P 500, but since a large chunk will flip to LTG thought of reallocating popped into our minds.

outside of the administrative portion on our part of reallocating funds over the next year, which we are fine in doing, is there any downside tax-wise to reallocation OR just keep it in the S&P 500?

*note* we are solidly in the 33+% fed and 6+% state for taxes.

thank you for any input

 

[Midpack]

Not much difference…lots of articles online comparing the two.

 

[karluk]

I think you should be much more concerned with the tax implications of what you're contemplating rather than the relatively minor differences between an S&P500 index vs. Total Stock Market fund. Specifically, I'm fairly certain there's a limit on the amount of unearned income a child can have without having it taxed at the parents' tax rate. Investopedia says the limit was $2,200 in 2020. With the amounts you have invested in the UTMA accounts, there is very real danger that a wholesale conversion from S&P500 to TSM would generate capital gains in excess of this limit. Being in the 33% bracket, you should strive to avoid exceeding the limit.

On the other hand, if you are careful to stay below the limit, it seems to me that it might be very beneficial to generate capital gains every year Your children may very well be in the 0% tax bracket and you could make the conversion with no tax consequences. That's probably preferable to keeping unrealized capital gains in the UTMA accounts and risk paying high taxes when the assets are eventually sold

 

[RunningBum]

Check into the taxation on this. My understanding is that gains are taxed at the minor's rate, not your. It may depend on their age, and there may be a limit before it gets taxed at your rate. Some 20 years ago I ran into that.

If it's taxed at your kid's rate, it seems to me you might as well take advantage of 0% LTCG rate (up to $40K counting all income sources, like a part-time job if they have one). This way you can keep increasing the account basis, and when they go to use the money, maybe they'll still be at 0%, or only a little bit at 15%.

 

[Lazyfabs]

Not much difference…lots of articles online comparing the two.

for sure the difference is negligible and we are 'fine' w/ either, our main concern was more regarding taxation issue more than anything.

gains as of today value that would fall in 2021 tax filing year would be ~$4600. about ~$4400 is the main chunk that flips to LTG tomorrow.

 

[Lazyfabs]

I think you should be much more concerned with the tax implications of what you're contemplating rather than the relatively minor differences between an S&P500 index vs. Total Stock Market fund. Specifically, I'm fairly certain there's a limit on the amount of unearned income a child can have without having it taxed at the parents' tax rate. Investopedia says the limit was $2,200 in 2020. With the amounts you have invested in the UTMA accounts, there is very real danger that a wholesale conversion from S&P500 to TSM would generate capital gains in excess of this limit. Being in the 33% bracket, you should strive to avoid exceeding the limit.

On the other hand, if you are careful to stay below the limit, it seems to me that it might be very beneficial to generate capital gains every year Your children may very well be in the 0% tax bracket and you could make the conversion with no tax consequences. That's probably preferable to keeping unrealized capital gains in the UTMA accounts and risk paying high taxes when the assets are eventually sold

the taxation is our main concern. thanks for the investopedia limit reminder, totally slipped our brains.

gains as of today value that would fall in 2021 tax filing year would be ~$4600. about ~$4400 is the main chunk that flips to LTG tomorrow.

given the $2200 limit and potential any gain from the fund, fideltiey 500 FXIAX, gives out. the last time gains were distributed though was 4/2019.

given the minor differences b/w the funds, minor administrative doings over the next year, and potentialy not going over the $2200 tax limit, might just be easier to stay put.

 

[Lazyfabs]

Check into the taxation on this. My understanding is that gains are taxed at the minor's rate, not your. It may depend on their age, and there may be a limit before it gets taxed at your rate. Some 20 years ago I ran into that.

If it's taxed at your kid's rate, it seems to me you might as well take advantage of 0% LTCG rate (up to $40K counting all income sources, like a part-time job if they have one). This way you can keep increasing the account basis, and when they go to use the money, maybe they'll still be at 0%, or only a little bit at 15%.

they are 13.5 & 13. will take a closer look at the potential 0% LTG rate, as noted in one of my replies as of todays value gains they would be taxed on is about ~$4600. about ~$4400 is the main chunk that flips to LTG tomorrow. the remaining ~$200 is a few automatic investments we have done monthly.