Tomorrow: Your responses to Friday’s column. But today . . .
ENRON: WHOSE FAULT WAS IT ANYWAY?
Here’s an interesting piece from the Charlotte World. Yes, it concedes, greed contributed to the Enron mess. But the corrupting influence of gays and lesbians was a major contributing factor as well. ‘Not incidentally,’ reports the World, ‘all of the ‘Big Five’ accounting firms, including Arthur Andersen, now offer same-sex benefits.’
It is, I feel sure, the original caveman rallying cry. (I base this information on nothing but primal instinct.) You want more food? UGMA! UGMA! Your team is winning the Flintstone Olympics? UGMA! UGMA! A pretty cavewoman passes by? UGMA! UGMA! (Cavewomen would have had an entirely different cry, heavier on the treble, which I can hear in my head but not spell.)
Al Stitz: ‘I started saving for my two kids’ college expenses back in the the late 80’s and early 90’s using UGMA [Uniform Gift to Minors] accounts. I typically have to pay income taxes in the kid’s names every year. Can I convert the UGMA accounts into Section 529 tuition accounts to save on taxes?‘
☞ Who the heck knows? Less Antman, that’s who! I transmit one of these questions from a beacon on top of my computer . . . he receives it on his zirconium CPAger ring . . . sidles off unnoticed into a phone booth . . . changes into a cape and boots . . . and – off he goes!
Let me preface his answer by explaining Al’s motivation. Money inside a Section 529 Qualified Tuition Plan grows tax-free . . . and can be withdrawn tax-free to pay for tuition. That’s a pretty great deal. The exact terms of the Section 529 plan vary from state to state (I like the Utah plan, among others), so a lot of people use savingforcollege.com to find a plan they like.
But then the question becomes, how to fund it? Can you take the money you’ve already salted away in an UGMA bank or brokerage account – with you as the custodian because at 3, Janie couldn’t be expected to do the paperwork and make the investment decisions – and somehow switch it into one of these wonderfully tax-advantaged Section 529 plans?
‘You cannot ‘convert’ UGMA accounts to 529 accounts,’ Less reports, with a flourish of his cape, ‘but you can sell investments in a UGMA account and transfer the proceeds into a 529 plan . . . which should either be designated as a UGMA 529 or have the child as owner, to be technically in compliance with the law. You will incur taxes on the sale of the UGMA assets, if there are any built-in gains. But if the child is at least 14 or the child’s total income, including the gain, is less than $1,500, the federal tax rate on investments held over one year is 10% and on investments held over five years is 8%, and that isn’t a bad one-time tax to incur to make the future income tax-free (especially since the gains will eventually have to be realized to spend it on college, anyway).
‘A reasonable approach might be to stop reinvesting mutual fund distributions and instead take the cash and add it to a 529 plan. Then, sell as much as you can without pushing your child into the 20% long-term gains tax bracket (no problem if the child is 14, but limited to $1,500 total income if the child is younger), and add that to the plan as well. When the child is 14, sell the rest and add it to the fund. This assumes, of course, that you are willing to spend all the money in the 529 plan on college costs for the child. If you want the money available for other purposes, you must keep it out of the plan.’
Actually, you could do much the same thing transferring up to $2,000 a year into a Coverdell Education Savings Account (the old ‘Education IRA’). They, too, grow your money tax-free and allow completely tax-free withdrawal for tuition, and may involve less in the way of fees. And, Less says, ‘I’m pretty sure the income limitations on Coverdell Education Savings Accounts won’t apply, since the contributor is the child, not the parent. UGMA money – also known as UTMA money – is the property of the child.’