UTMA Account and College

Terry: In 1995, in the days before 529 plans were created, we established a college savings plan for our first-born son upon his birth. Fidelity marketed it as a college savings plan, but it’s really just a UTMA mutual fund account. In 1999, when his brother was born, we stopped contributing to it and set up 529 plans for both of them with the State of Oklahoma’s College Savings Plan, which have both grown to over $100,000 apiece. Today, there’s just over $19,000 in that UTMA account, and our son, now 19, is a sophomore at the University of Oklahoma, where he’s attending on a National Merit Scholarship, which covers five years of college costs at OU. Because of that, and with his 529 plan, even if he pursues a doctorate degree, he may not need that UTMA account for college costs. I often thought perhaps he could use it for a home down payment when the time comes, or perhaps to begin a Roth IRA once he beings working full-time. I believe I read once that for tax purposes, the best time to “cash out” a UTMA account is when his income is at its lowest level, which would be now, while he’s a full-time college student and at the lowest tax rate he’ll be at in his life. Do you agree? He’s a Chemical Engineering major, and if things go his way, he should do well in the job market after graduation. How would you handle the UTMA account? Thanks very much!

Terry Says:   The first thing to ask is whether he will be applying for financial aid.  If so, he MUST disclose the existence of that account, and it will weigh 5x more heavily against him in the aid formula than assets held by his parents.  That FAFSA disclosure for aid is used by both Federal and private student loan services.   And if the money is still in an UTMA account when he needs a loan for graduate school it will negatively impact him.

As for the UTMA account, at the age of majority in your state (either 18 or 21) the money is his to do with as he likes!  That may be a consideration in the decision about when to do something with the account.  If he is still a minor, you can take the money out of the account — but it must be used for his welfare — such as tuition or books or other purchases that will benefit him.  Or you can just let it become part of his assets — no problem, unless he is applying for financial aid.

Taxes are another story.  Here are the IRS rules on how taxes on any gains in the account must be paid:

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Unearned Income Only                                                       

A child who has only unearned income must file a return if the total is more than $1,050 (2015).

However, the parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child’s interest and dividend income on the parent’s return. If the parent makes this election, the child does not have to file a return.

Earned and Unearned Income

If a child has both earned and unearned income, he or she must file a return (2015) if:

• unearned income was over $1,050
• earned income was over $6,300, or
• earned and unearned income together total more than the larger of (1) $1,050, or (2) total earned income (up to $6,300) plus $350.

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So you should also consult with your tax advisor as to how the withdrawal will impact your taxes — and whether he can or must file his own return.

By the way, I should say that you are both incredibly generous and smart — and this young man is lucky to have such far-sighted parents!