#16161 - 05/30/01 11:09 AM
UTMA to 529, Tax Problem??
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MichelleS
Registered: 05/30/01
Posts: 1
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Considering the amended Section 529 code, I am wondering if there is a tax problem with moving money from an existing UTMA account to a 529 Plan (which will have tax free distributins beginning in 2002.)
Can this move be made? If so, (how) should it be reported to the IRS? I believe that the "old" way was to register the new 529 with the beneficiary as owner. But I think there may be a problem moving money from a taxable (deferred) investement to a tax free one. Has this issue been brought up anywhere yet?
Thanks!
Michelle S
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#16162 - 05/30/01 11:38 AM
Re: UTMA to 529, Tax Problem??
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Drew
Registered: 01/09/00
Posts: 2478
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You are missing a major point about UTMA's, at age 21 (18 for UGMA's) if the funds are not expended for college the kid can go buy a Harley and spend the rest for grass. Unless you are POSITIVE about all this never to happen then neither a UTMA or nor a 529 held in UTMA format is SAFE.
I strongly suggest you think about spending down the UTMA by whatever legal means you have and putting 'new' money into a 529 NOT owned by the child.
However if you insist; There is nothing to say you cannot liquidate the UTMA, take whatever tax hit is due, pay taxes out of UTMA, then reinvest the proceeds in a 529 held in UTMA format in one of the several states what permit same. There are no special reports required. Sch D and 1040 for the liquidation if required.
Keep in mind that a UTMA outside a 529 may be far more flexible than a UTMA 529--you cannot move a 529 once you set it up this way!! And for many assets held 5 years if liquidated carefully the LT gain rate is effectively 0 or 8% for youngsters?
The UTMA is a creature of state law and has nothing to do with taxes per se.
The only problem, not in the literature, is a kid could if really PO'd at the custodian could complain that he was injured by custodian investing in an instruement which prohibited him from taking out his money and running at 21 w/o a penality on the income portion assuming he didn't go to college or felt it was a parental duty to provide same. (Some state courts get some strange ideas on college as a duty of perents to pay---) If the family dynamics are poor you may want to CYA.
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Drew
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#16163 - 06/25/01 06:22 PM
Re: UTMA to 529, Tax Problem??
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markmohr
Registered: 06/25/01
Posts: 6
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Everything I've seen on this so far (rolling an UTMA over to a 529) involves liquidating the account (with tax consequences) and then establishing a new 529 CUSTODIAL account...not an individual one, a CUSTODIAL account....Drew has some interesting thoughts on that elsewhere in this thread which I agree with.
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Mark Mohr
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#16164 - 06/25/01 07:51 PM
Re: UTMA to 529, Tax Problem??
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Raghuraman
Registered: 06/03/01
Posts: 2
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The main new UTMA issue arising from the new tax changes involve the availability of tax free income, in a 529 plan, over and above the $700/year available until now for a typical UTMA account earnings.
Normally this makes no difference to those who are just starting out and the principal required to generate even this $700/year earning is so much larger than what ever principal they may now have in an UTMA account. However, consider the case where a parent is gradually liquidating a 6 figure portfolio (25% per year) for the impending college expenses 4 years from now. The taxes due on the money liquidated has already been paid and the "cash" is now sitting "safely" in Bank CD's but, sad as it may seem, fully liable for additional taxes on the earning for the next 3 years! The thought of moving this money in to Utah ,option 1, 529 plan does seem very very reasonable to me.
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#16165 - 06/26/01 11:26 AM
Re: UTMA to 529, Tax Problem??
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Drew
Registered: 01/09/00
Posts: 2478
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If you are liquidating a portfolio to get ready for college be very careful if any aid is in the picture.
1. Income generated in the tax year prior to application hurts aid.
2. Also consider gifting as much as possilbe under 10K rules to kid to shift income effect to a lower bracket (but not in final year if any aid is sought.) Note there are some special rules as to holding period for some extra low LT gain rates if kid is in 15% bracket. Read them first.
3.Why liquidate just to have cash sit at CD rates? But keep in mind that you can only move so much into a 529 as a gift.
4. Ask Joe, but as far as I know since you cannot make a gift to yourself, you could move a very large amount of your money to your own 529 w/o any gift tax issue to get it under the tax free income umbrella,subject to plan caps, THEN you could move amounts out in 10/50K increments w/o tax issues.
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Drew
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