Best method to "gift" TSLA for newborn?

[insaneoctane]

Thinking ahead for someday when I have grandchildren (God willing). I'd like to set aside $5K to $15K worth of TSLA for college (or more). A dedicated 529 will NOT let you invest in individual stocks. A Roth IRA is perfect because it works for college and any extra then works for retirement, except you can't contribute to it until they are old enough to earn money themselves....What's the best strategy for setting up TSLA for college?

 

[wtlloyd]

Thinking ahead for someday when I have grandchildren (God willing). I'd like to set aside $5K to $15K worth of TSLA for college (or more). A dedicated 529 will NOT let you invest in individual stocks. A Roth IRA is perfect because it works for college and any extra then works for retirement, except you can't contribute to it until they are old enough to earn money themselves....What's the best strategy for setting up TSLA for college?

But a Roth IRA is only for earned income. No earn, no Roth.

 

[LostPawn]

You have a few options... If you pay directly to the school (assuming the grandkids go to school while you are around) it's doesn't count toward gifting limits. You could do a custodial account for them and buy the stock there. You can also setup a trust and have a bit more control than a custodial account.

 

[Tyler34]

My plan is to gift stock above the 15k gift limit. Then capital gains tax harvest each year for the kid up to the 0% capital gains tax limit. In 2022 that limit is $41,675 of realized capital gains at 0% tax. If all goes to plan, that means they will have the value of the shares, with no tax liability, and no Roth or 529 restrictions

 

[MikeC]

My plan is to gift stock above the 15k gift limit. Then capital gains tax harvest each year for the kid up to the 0% capital gains tax limit. In 2022 that limit is $41,675 of realized capital gains at 0% tax. If all goes to plan, that means they will have the value of the shares, with no tax liability, and no Roth or 529 restrictions

Isn't a custodial account taxed at the parents' rate until age 16 or something like that?

 

[73Bruin]

Isn't a custodial account taxed at the parents' rate until age 16 or something like that?

That used to be the case and some quick research showed that it was the case for 2021. I did tax harvesting for my kids when I set up their gift accounts back in the 90s. The problem is that only the first $1100 of unearned income was untaxed and the second $1100 was taxed at the minimum rate. After $2200, it was taxed at my tax rate for investments, which was sometimes over 15%. The income limits for kids are not indexed and haven't changed in years.

It is also subject to capital gains , and who knows what that will be when your children are ready to go to school. By contrast 529 plan money spent on qualified educational expenses are not taxed.

 

[Tyler34]

That used to be the case and some quick research showed that it was the case for 2021. I did tax harvesting for my kids when I set up their gift accounts back in the 90s. The problem is that only the first $1100 of unearned income was untaxed and the second $1100 was taxed at the minimum rate. After $2200, it was taxed at my tax rate for investments, which was sometimes over 15%. The income limits for kids are not indexed and haven't changed in years.

It is also subject to capital gains , and who knows what that will be when your children are ready to go to school. By contrast 529 plan money spent on qualified educational expenses are not taxed.

Do you claim your kids as a dependent. Asking if that has bearing on how they are taxed?

 

[MikeC]

Do you claim your kids as a dependent. Asking if that has bearing on how they are taxed?

I don't think it does:

Custodial Account Taxes 101

Everything you need to know about filing and paying taxes on your child’s UGMA account.

www.getearlybird.io

"Capital gains taxes on custodial accounts

The key custodial account tax rule you’ve got to understand is the IRS “kiddie tax”. The kiddie tax is used to tax a child’s capital gains and unearned income accumulated over the course of a tax year.

Under the kiddie tax, the first $1,100 worth of a child’s capital gains generated during a given tax year won’t be taxed at all. The next $1,100 in unearned income is then charged at the child’s tax rate. Everything above $2,200 will be taxed at the adult custodian’s tax rate.

Before you start adding up the numbers, you’ll be glad to hear that the kiddie tax rules don’t apply to a child’s salary or wages they receive from employment — it’s only unearned income.

So if your 15-year-old earned $1,500 painting apartments over the summer, and their custodial account generated $1,050 in capital gains, that account would still be sitting below the 0% threshold for unearned income.

The kiddie tax applies to children under 19 years old, as well as full-time students under 24 years old who are filing under their parents’ tax return."

 

[MikeC]

I wonder if it is worth it to take the free $2200 deduction every year, though. Could I sell a few shares and immediately buy them back at a higher cost basis or is there some kind of wash sale rule that prevents that?

 

[73Bruin]

I wonder if it is worth it to take the free $2200 deduction every year, though. Could I sell a few shares and immediately buy them back at a higher cost basis or is there some kind of wash sale rule that prevents that?

I have no clue if the wash sale rule applies in a gain situation. It's not a normal strategy except in this type case. FWIW, wash sales for losses occur within a 61 day window, 30 days before and after the actual trade date.

 

[MikeC]

I have no clue if the wash sale rule applies in a gain situation. It's not a normal strategy except in this type case. FWIW, wash sales for losses occur within a 61 day window, 30 days before and after the actual trade date.

Thinking about this more, wash sales are only for losses. So there's no reason I couldn't realize gains and then buy back immediately.

I found this Bogleheads thread: Help with UTMA and tax gain harvesting - Bogleheads.org

My kids shares from 2018-2019 are sitting on big LTCG, I wonder if it makes any difference whether this is done at a higher or lower share price? I think probably not, because $2200 LTCG is decreased independent of total LTCG. In which case, maybe I will wait for the split to be able to get as close to, but under, $2200 as possible.

 

[mtbwalt]

Pretty sure you can just invest in your own Roth IRA and use it to pay for grandkids college without any early withdrawal penalty. It would stay in your name but if you are spending on qualified kid or grandkid educational expense I think no penalty. You might want to specify in your will that it would go into a trust for the child as an inherited Roth if you pass. Disclaimer: I am not a financial advisor.

 

[insaneoctane]

Pretty sure you can just invest in your own Roth IRA and use it to pay for grandkids college without any early withdrawal penalty. It would stay in your name but if you are spending on qualified kid or grandkid educational expense I think no penalty. You might want to specify in your will that it would go into a trust for the child as an inherited Roth if you pass. Disclaimer: I am not a financial advisor.

Great idea, but after a certain income threshold, you're not eligible to invest in Roth IRA at all. As the parent or grandparent, it seems more likely this will apply to you than them (but of course they aren't eligible to contribute to Roth for the first 10-15 years of their lives)

 

[Tiger]

Just don't do it

For example, Elon Musk didn't have money when he got started.

 

[73Bruin]

Pretty sure you can just invest in your own Roth IRA and use it to pay for grandkids college without any early withdrawal penalty. It would stay in your name but if you are spending on qualified kid or grandkid educational expense I think no penalty. You might want to specify in your will that it would go into a trust for the child as an inherited Roth if you pass. Disclaimer: I am not a financial advisor.

Why in the world would you want to do this as opposed to a 529 (outside of the ability to own stock)? There are so many downsides, the first of which being you are limited to a single $6000 per year contribution (plus catchup) that would need to somehow divey among your children or grandchildren. You can make a single year contribution up to the $16,000 gift limit per year for each child or grandchild. If you believe in compounding you can make a lump sum contribution of up to 5 years gifts or $80,000 per child or grandchild. Any unspent moneys can be gifted to other students in your family (e.g. nieces and nephews) or even yourself. It can be potentially used to payoff $10,000 per year of existing student loans. You can also use it as a personal emergency fund with the understanding that 9f you don't spend it on qualified educational expenses you will need to pay taxes on the gains and a 10% penalty.

IMO, you should use the Roth for your own retirement or for a tax free portion of your estate.

 

[mtbwalt]

Why in the world would you want to do this as opposed to a 529 (outside of the ability to own stock)? There are so many downsides, the first of which being you are limited to a single $6000 per year contribution (plus catchup) that would need to somehow divey among your children or grandchildren. You can make a single year contribution up to the $16,000 gift limit per year for each child or grandchild. If you believe in compounding you can make a lump sum contribution of up to 5 years gifts or $80,000 per child or grandchild. Any unspent moneys can be gifted to other students in your family (e.g. nieces and nephews) or even yourself. It can be potentially used to payoff $10,000 per year of existing student loans. You can also use it as a personal emergency fund with the understanding that 9f you don't spend it on qualified educational expenses you will need to pay taxes on the gains and a 10% penalty.

IMO, you should use the Roth for your own retirement or for a tax free portion of your estate.

The challenge was to provide a tax-advantaged method for investing in a single stock for the benefit of grandchildren with no earned income. Your methods of gifting avoid taxation at gifting, but of course you paid tax on it and the custodial account it goes into is a taxable brokerage account - so appreciation is taxed.

I’m not saying that using a personal Roth to pay for kids or grandkids school is smart money management. Any fool knows that you want to keep the money in the Roth as long as possible. But it is one of the few tax advantaged ways to perform a single stock investment as laid out l.

 

[73Bruin]

The challenge was to provide a tax-advantaged method for investing in a single stock for the benefit of grandchildren with no earned income. Your methods of gifting avoid taxation at gifting, but of course you paid tax on it and the custodial account it goes into is a taxable brokerage account - so appreciation is taxed.

I’m not saying that using a personal Roth to pay for kids or grandkids school is smart money management. Any fool knows that you want to keep the money in the Roth as long as possible. But it is one of the few tax advantaged ways to perform a single stock investment as laid out l.

I understand the OP's challenge wanting to own a single or set of specific stocks and I agree with you that it can be done with a Roth IRA. However, I also agree that it's not smart money management to use a Roth to accomplish this. IMO, a financial advisor who went along with this would be guilty of malpractice. So rather than say here's how to do it, I thought it better to ask why anyone would want to do this given the flexibility advantages of a 529 investment and the similarities in terms of their tax treatment when used for qualified educational expenses. FWIW, I never mentioned a taxable investment account.

A couple of points that you made that I don't understand.

1. By definition all of the money that the OP wanted to invest in Tesla stock in a Roth has already been taxed or will be before he buys it, just as a contribution to a 529 would already have been taxed. Hence there is no difference in the original pre or after tax cost of the investment.
2. 529 plans are not regular taxable accounts, any accumulated gains made by the investment(s) in the account are not taxable either at the time they occur or when taken out to pay for qualified educational expenses. Therefore, there would be no taxable differences between a Roth IRA and a 529. There would of course be unknowable investment return differences and expense differences.

 

[mtbwalt]

You had mentioned gifting assets to the child. That works, but growth in the assets is taxed.

IMO if single stock is the criterion, the OP should just create another taxable account in his own name and put the stock in there to grow. Then in 18 years if the kid actually goes to college and needs the money, use the proceeds and take the long term capital gains hit.

It’s malpractice to hinge this kids educational future on a highly speculative single growth stock like TSLA, but here we are. A 529 serves better and having put my own 4 children through college and grad school paying 100% of their qualified expenses through 529s that I grew over they years, it is the route I chose. This scenario set up by the OP is just a speculative exercise - how to do something similar to a 529 in terms of tax advantage, but for a single stock.

 

[73Bruin]

You had mentioned gifting assets to the child. That works, but growth in the assets is taxed.

IMO if single stock is the criterion, the OP should just create another taxable account in his own name and put the stock in there to grow. Then in 18 years if the kid actually goes to college and needs the money, use the proceeds and take the long term capital gains hit.

It’s malpractice to hinge this kids educational future on a highly speculative single growth stock like TSLA, but here we are. A 529 serves better and having put my own 4 children through college and grad school paying 100% of their qualified expenses through 529s that I grew over they years, it is the route I chose. This scenario set up by the OP is just a speculative exercise - how to do something similar to a 529 in terms of tax advantage, but for a single stock.

I think we are in agreement. I also funded my 2 daughter's college education via 529's (and the original educational IRA program). They had some left over that I am holding for some eventual grandchildren. FWIW, I also made gifts to my daughter's via UGMA accounts that were established before 529's were approved. I mentioned the gift tax limit because annual contributions to a 529 are limited to the annual exclusion from gift tax (currently $16,000) or a once in 5 years lump sum of 5 times the gift tax exclusion.

I'm done on this topic.

 

[AquaY]

Isn't a custodial account taxed at the parents' rate until age 16 or something like that?

Age 18