UTMA--questions about cashing out to pay tuition

[Nancy in NH]

We have a very small UTMA account that was set up for ds when he was born.  Is there anyone who has cashed one out to put towards tuition that can advise me whether or not it matters when you cash it out?  First semester tuition is due end of July (bills won't be available until early July), and we'd like to put it towards that.  Are there any tax or timing issues I should know about?  Like, if we cash out now and put it in ds's savings account where it will sit for a few months before we pay tuition, is that a problem?  

 

I've been watching the balance declining in the past few weeks and I'm getting nervous about that.

 

Nancy

[maize]

Not an expert, but I dont think you would have a problem. As long as the money is going to your child to pay for their expenses I don't think it matters if the money sits in savings for a bit.

Edited May 6, 2016 by maize

[Lori D.]

We had an ESA, not a UTMA, so no personal experience with UTMAs.

 

This article, "3 Big Differences Between 529 College Savings Plans, UTMA Accounts" is helpful in outlining the differences, but it also gives you an idea of what to expect as far as tax ramifications when you transfer the funds to the student.

 

Without being a tax expert and no experience with a UTMA, it looks like when you cash out the UTMA, it goes straight into the student's name and bank account, so the timing of this would be important: do it after turning in your FAFSA so those funds don't show up as student assets and make the EFC number of the FAFSA skyrocket and knock the student out of potential federal financial aid (grants or work study), or need-based scholarships. I'd probably time it so that you are spending as much of the UTMA as possible right after cashing it out -- so, very close to the tuition payment due date. NOTE: this article ("When Can a Parent Cash out a UTMA or a UGMA?") indicates there may be state prohibitions on the timing of cashing out a UTMA.

 

This year is a good year to cash it out, because normally those funds would ALSO affect NEXT year's FAFSA calculations of the EFC (because the UTMA is a student asset); however, because the FAFSA is being restructured, the same 2016 tax return will be used by FAFSA for calculating EFC for both this year (2016) AND next year (2017) -- so, esp. if all of the UTMA is spent this year, there will be no funds showing up in the student's assets for future FAFSA years. :)

 

Whenever you cash it out, your student WILL have to file a tax return next and pay taxes on the full amount of the UTMA, as there is no educational expense deduction with a UTMA. If this were an ESA or an educational bond, any portion of the cashed out ESA or bond that is spent on tuition & fees or qualifying educational expenses is not taxed. BUT, the UTMA is not designed to be a specific educational tax shelter, so all of the amount will be taxed. And it will be the student who is responsible for filing a tax return in their name, as the tax documents (it's not a W-2, but whatever form documents the receiving of funds from a tax-sheltered account) will be coming in the student's name. This Turbo Tax Q&A explains this, and is a bit similar to your situation.

 

It's SUPER you have those funds available! Hopefully, there will be just enough to cover college costs this year, with enough left over to pay the taxes on next year's tax return, minimizing the "hit" that comes with cashing out. :)

 

PLEASE do NOT just take my uninformed thoughts above as fact ;) -- be sure to talk to a knowledgable tax consultant who specializes in college financial aid matters to walk you through this.

 

BEST of luck! Warmly, Lori D.

Edited May 6, 2016 by Lori D.

[Nancy in NH]

Without being a tax expert and no experience with a UTMA, it looks like when you cash out the UTMA, it goes straight into the student's name and bank account, so the timing of this would be important: do it after turning in your FAFSA so those funds don't show up as student assets and make the EFC number of the FAFSA skyrocket and knock the student out of potential federal financial aid (grants or work study), or need-based scholarships. I'd probably time it so that you are spending as much of the UTMA as possible right after cashing it out -- so, very close to the tuition payment due date. NOTE: this article ("When Can a Parent Cash out a UTMA or a UGMA?") indicates there may be state prohibitions on the timing of cashing out a UTMA.

 

This year is a good year to cash it out, because normally those funds would ALSO affect NEXT year's FAFSA calculations of the EFC (because the UTMA is a student asset); however, because the FAFSA is being restructured, the same 2016 tax return will be used by FAFSA for calculating EFC for both this year (2016) AND next year (2017) -- so, esp. if all of the UTMA is spent this year, there will be no funds showing up in the student's assets for future FAFSA years. :)

 

Whenever you cash it out, your student WILL have to file a tax return next and pay taxes on the full amount of the UTMA, as there is no educational expense deduction with a UTMA. If this were an ESA or an educational bond, any portion of the cashed out ESA or bond that is spent on tuition & fees or qualifying educational expenses is not taxed. BUT, the UTMA is not designed to be a specific educational tax shelter, so all of the amount will be taxed. And it will be the student who is responsible for filing a tax return in their name, as the tax documents (it's not a W-2, but whatever form documents the receiving of funds from a tax-sheltered account) will be coming in the student's name. This Turbo Tax Q&A explains this, and is a bit similar to your situation.

 

It's SUPER you have those funds available! Hopefully, there will be just enough to cover college costs this year, with enough left over to pay the taxes on next year's tax return, minimizing the "hit" that comes with cashing out. :)

 

PLEASE do NOT just take my uninformed thoughts above as fact ;) -- be sure to talk to a knowledgable tax consultant who specializes in college financial aid matters to walk you through this.

 

BEST of luck! Warmly, Lori D.

 

I guess I should have been more clear.  I am no longer the custodian of the UTMA, as my son is 19, so he will be cashing it out.  It is really not substantial at all and won't come close to covering even 1/2 of his 1st semester bill.  I also realize he will pay taxes on it as unearned income (and at our tax rate due to the 'kiddie tax', which believe me, is not that big of a concern  :001_smile:).  I am bothered by the tax implications that I didn't know about when we threw a one time gift from his grandparents into the account 18 years ago, but there isn't much I can do about that now.

 

We are just trying to decide whether he should pull the money now and put it into his bank savings account, because the UTMA account is getting hit over the past few weeks and has been declining in value, and it isn't much to begin with.  I hate to see the balance go any lower...

 

My main concern was whether him cashing it out months in advance of actually paying the tuition had any further implications.  We already included that investment on his FAFSA for this year.  For next year, it will already have been spent on tuition and that amount totally depleted.

 

Thanks for the links.  My daughter has some money saved and we plan to invest it soon, and we'll be making a more informed choice this time around!

 

Nancy

 

[Lori D.]

Well, you're clearly way ahead of me and anything I could contribute, and you sure sound like you have all your ducks in a row to me! That is super! :)

 

Probably best to talk to an real life tax consultant who is an expert with college financial aid on the timing of cashing out, just to make sure you aren't missing anything. BEST of luck to your DC and their college adventures! Warmest regards, Lori D.

Edited May 6, 2016 by Lori D.

[Nancy in NH]

Well, you're clearly way ahead of me and anything I could contribute, and you sure sound like you have all your ducks in a row to me! That is super! :)

 

Probably best to talk to an real life tax consultant who is an expert with college financial aid on the timing of cashing out, just to make sure you aren't missing anything. BEST of luck to your DC and their college adventures! Warmest regards, Lori D.

 

Oh, believe me, Lori, we are not way ahead.  Eek--no!  I meant the kiddie tax rate wasn't much of a concern because we're in a low tax bracket.  Thank goodness ds got a great scholarship/aid package from one school or he would not be attending any school this year.  I'm grateful for the $1,000 my folks gave ds back then, but it hasn't amounted to much--it took a huge hit at one point that almost wiped out the account entirely.  We are cutting everything possible to help ds with school, but with his and his brother's chronic medical conditions over the years (and still ongoing), it has made it impossible for us to do much more than just survive day-to-day.

 

I will see if I can find a tax consultant to help.  I certainly won't be attempting to do our taxes next year.  I hate the thought of paying someone, especially because it's really only because all this college stuff is so complicated, but I don't want to worry about it either.

 

Thanks very much for your help!

Nancy

[Lori D.]

Oh, believe me, Lori, we are not way ahead.  Eek--no!  I meant the kiddie tax rate wasn't much of a concern because we're in a low tax bracket.  Thank goodness ds got a great scholarship/aid package from one school or he would not be attending any school this year.  I'm grateful for the $1,000 my folks gave ds back then, but it hasn't amounted to much--it took a huge hit at one point that almost wiped out the account entirely.  We are cutting everything possible to help ds with school, but with his and his brother's chronic medical conditions over the years (and still ongoing), it has made it impossible for us to do much more than just survive day-to-day.

 

I will see if I can find a tax consultant to help.  I certainly won't be attempting to do our taxes next year.  I hate the thought of paying someone, especially because it's really only because all this college stuff is so complicated, but I don't want to worry about it either.

 

Thanks very much for your help!

Nancy

 

Oh, goodness, Nancy, for $1000, yes, pull it out and put it into a Money Market or savings account until you need to use it for tuition in July. I honestly can't picture that very small amount making you take a hit in your taxes (or DS's taxes) in any way...

 

SO glad about the scholarship and aid pkg! :) Warmest regards, Lori D.

[maize]

I read that the first $1000 in earnings on a UTMA account are tax free; if the account is small it probably has no tax impact.

 

And now that the child has reached maturity there are no restrictions on what the money can be used for. I've done a little looking and can't see any reason not to cash out now, but if you are not sure you could put the money in a savings account or money market fund still within the UTMA structure.

[Nancy in NH]

Thank you, maize and Lori!  This discussion has put me at ease.  I hate seeing his pittance of a college fund decline in value any more than it has in the past few weeks, so I think I'll urge DS to transfer the funds to his savings account tomorrow.  It won't earn much there, but it's better than losing value.  I keep telling myself the market could take a turn, but I'm not into gambling at this stage!

 

Thanks again!

 

Nancy