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Usually I think I have a good grip on these things, but I find myself stumped as to how to manage the upcoming college funds of my twins to be next January.

Here's the deal:

Have UTMA regret with my 3-year old's account. It's growing so well based on some solid mechanical investing (MI), that I fear the day she gets access to a huge portfolio at age 18. (I expect it to be somewhere between $125K and $200K. I plan to instill in her the best of money wisdom that I can, but you know...

So my grandmother expects to gift the same $10,000 to the twins. UTMA saves up to $329/year in federal taxes (0% first $700, 15% next $700, my rate is 31%). I find it somewhat of a disadvantage not being able to use 10-15% margin because margin is not allowed in UTMA/UGMA's.

Alternatives:

Traditional-IRA - NOPE, not even close to qualifying.

Roths - already maxed out and probably won't qualify for them after next year due to income phase outs.

Non-deductible IRA's - Usually this one is ugly, but Roth's are not an option beyond my current retirement planning, so I think this could work. My understanding is that you can still do $2K/year at any income level. Yes, it gets taxed at full ordinary income tax rates, but since I typically do monthly and quarterly rebalancing of the growth/momentum portion of the portfolio (about 2/3rds of total value), this may not be so bad. I read that I can withdraw before 59 1/2 if it is for education or for up to $10,000 (lifetime) for a first time home purchase which can apply to my kids. If they don't go to college/buy a home, it stays tax sheltered in my name. Oh yea, it will be a pain managing multiple accounts since I can't dump all $10K in at once. Also, no margin.

Traditional taxable account in my name: I get control, lose some tax advantages (most notably at age 14 when the kiddie tax no longer applies). I could direct it to first home downpayment help, weddings, yadda yadda. There may be a significant downside in terms of qualifying for financial aid if the rules don't change much 18 years from now. Margin available. Can unify into a single account vs 2 to 4 with other options.

Are my assumptions about the different types of accounts and how they can be used correct?

Any help would be appreciated.

Thanks,
Buckaroo
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Are my assumptions about the different types of accounts and how they can be used correct?

Not quite. Although you are limited to a $2,000 annual IRA contribution, it doesn't have to be a different account each year. You can make all your contributions, over time, into the same account. If you were planning on paying for both twins' college out of your IRA (congratulations, BTW), you can do so out of one account.

You might also want to check out the Paying for College board for some insight about the ways different types of assets are treated in financial aid qualifying analysis.

TMF ExRO
Phil Marti
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Have UTMA regret with my 3-year old's account. It's growing so well based on some solid mechanical investing (MI), that I fear the day she gets access to a huge portfolio at age 18. (I expect it to be
somewhere between $125K and $200K. I plan to instill in her the best of money wisdom that I can, but you know...


You might want to check the age at which you must turn over UTMA/UGMA funds to minors in your state. In Oregon (and perhaps other states), you may turn over an account at 18 years but at 21 you must. This gives an extra three years for some sensibility to set in and Foolish ways to develop. :)

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<<Have UTMA regret with my 3-year old's account. It's growing so well based on some solid mechanical investing (MI), that I fear the day she gets access to a huge portfolio at age 18. (I expect it to be
somewhere between $125K and $200K. I plan to instill in her the best of money wisdom that I can, but you know...>>

Well...consider an irrevocable trust for your daughter. Since she's only 3, you have MANY years to grow the irrevocable account, and the trustee will then be bound to release funds only on the terms of the trust. Funds can be released for college expenses, perhaps a car, things like that. But the trustee can draw the line at tattoos and kegs of beer.

And not only that, an irrevocable trust with Crummey provisions will help you from an estate tax point of view also, since the funds in the trust would not be counted against the value of your estate should you pass on before your child reaches the age of majority.

So there are a number of issues to consider.

TMF Taxes
Roy
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Well...consider an irrevocable trust for your daughter. Since she's only 3, you have MANY years to grow the irrevocable account, and the trustee will then be bound to release funds only on the terms of the trust. Funds can be released for college expenses, perhaps a car, things like that. But the trustee can draw the line at tattoos and kegs of beer.

Thanks, Roy.

Looks like I've got some more research to do.

Buckaroo
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