Custodial Accounts for Children
Hi Terry,
You’ve spoken before about your preference for 529 accounts over a brokerage UTMA. When my daughter was born, we made the choice to contribute around 75% of what we could for her to a 529, and 25% to a UTMA. I’m reconsidering the wisdom of that choice and I’d like to consider selling assets from her UTMA and reinvesting the proceeds from those sales into her 529. I understand the tax implication that she would be responsible (in reality, me, as she is 4!) for paying tax on any income over $1,350.
However, I’ve seen conflicting ideas online about whether this is allowed at all or not. On the one hand, gifts into a UTMA are irrevocable. On the other, as the custodian of the account I believe I have the authority to make financial decisions provided that they are in her best interest, and since I will be able to concretely demonstrate the contribution to her 529, I would think that in the spirit of the rules, I would be in the clear.
What do you think?
Thank you,
Mike
Terry Says
You CAN do that conversion now — and the sooner the better for the tax reasons you describe. At this point, there is likely very little growth to impact taxes, but down the road that might not be the case. And if you live in Illinois, or another state with a tax benefit, you will get up to $10,000 credit against state income taxes.
Read this for the details of converting from an UGMA to a 529.
https://www.savingforcollege.com/article/should-you-convert-an-ugma-or-utma-to-a-529-plan-or-not
