Texag5324 said:

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ABATTBQ11 said:

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Not sure how good this is, TBH. It's post tax contribution for parents, and growth is taxed as ordinary income when withdrawn for qualified distributions and ordinary income with a 10% penalty for all other withdrawals. Might as well just start a brokerage account for your kids if you don't get the free money.

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Employer's can add up to $2500 in these accounts, pre tax. Ted Cruz wrote a letter to Fortune 1000 CEO's encouraging them to participate.

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That's nice and all, but I don't see that going much of anywhere. Tons of small to medium businesses aren't going to do it, and I don't see big businesses offering a benefit that short changes single and childless employees.

I don't know all of the details... I said IRA, but you're correct it would be specifically a Roth IRA if it were to be rolled over in a post tax type account.

Under UTMA the recipient carries forward the cost basis. It's generally used to directly transfer investment assets. So the minor ends up owing significant capital gains when they sell those investments.

Yeah... as for what happens when the mid turns 18, I've only heard/seen handwaving pontifications that suggest certain qualifying distributions.

Disclosure -- I have not researched or read the text of BBB regarding these accounts.

its a pathetic attempt at buying votes and branding a govt program to build up a mans ego.......

Exact same thing Obama did with healthcare but obviously to a much smaller scale.



Just cut income taxes and be done with it.

Kenneth_2003 said:

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tysker said:

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FTAC2011 said:

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Tax free growth is overrated??? Assume you max out these accounts for 60 years. For 60 years the growth in the accounts will be 21 million vs 350k of contributions.

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What do you mean by "tax free growth?" Capital appreciation is almost always tax free.
A large majority of people dont max out their retirement accounts now. A married couple can gift $38,000 ($19k x 2) to each of their kids right now, and yet many people don't do it.

I've known hundreds if not thousands of trust fund babies. In my experience, for many, when they know they have a large pool of $$ coming into their life during their 40s and 50s, they treat their 20s and 30s differently than your typical upper middle-class person.

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Tax-Free growth because this will be invested. It's after tax dollars from the parents, as well as potential for parents employers to contribute.

Regardless the fund will not have capital gains taxes on it since it's sitting in the markets.

Prior to this, there are two ways to transfer (outside of a trusts) money to minors. There is, as you mentioned, the annual $19k (per person) gift that can be done tax free. If that money is then invested it will grow and capital gains will be owed when the investments are sold. The other way is via UTMA (Universal Transfer to Minors Act) where a parent can transfer investments to the minor at the parents original basis.

What trust fund babies do with their money is a them problem. It's not a me problem.

Again my understanding is these accounts can be rolled out of for certain qualified expenditures at 18. They can go into an IRA, they can be used for college or trade school, or they can be used to purchase a home. I haven't heard specifics, only generalizations though.

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You can withdraw for those qualified expenses, but that is only a penalty-free withdrawal. You're still paying ordinary income tax on gains from the withdrawal, so you contribute like a Roth but get taxed (almost) like a traditional. The growth is not tax free so much as it is tax deferred, but that doesn't help much when you could simply open a brokerage account with more freedom and flexibility and taxed at lower capital gains rates.

ETA Even if you rollover to a Roth you have to treat it like a normal conversion and pay taxes on gains. The only advantage here is starting earlier and getting around contribution limits for the Roth that would be on place if you were trying to transfer a large sum from brokerage. However, it may still be better to do a brokerage account and piecemeal into a Roth because of capital gains rates versus normal income on gains in the conversion. Depends on a lot of factors

Honestly, an infinitely better option would be extending Roth eligibility to minors and allowing parents to fund it, because that's basically the only advantage this has beyond the added qualifying events for penalty exemption. Just add that to the Roth, too, and make everything simple.

As it is, there are going to be very few households (beyond those getting seed money) that this will realistically benefit or that will understand the hoops to jump through to make this worthwhile. This very much seems like pandering.

I thought the parents contribution (and any employer contribution) was an after-tax contribution, being treated more like a ROTH account.

So the parent's after tax contribution is then taxed on the kids side as ordinary income?

Quote:

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Under UTMA the recipient carries forward the cost basis. It's generally used to directly transfer investment assets. So the minor ends up owing significant capital gains when they sell those investments.

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Which is why you often want transfer you higher cost basis stock to your kids, or just deposit cash.

Couldn't Congress simply pass a law to change the tax status of the cost-basis and accomplish a similar goal? That's what I'm getting at. We already have investment vehicle frameworks for this; I'm not sure why we need another one.

Dungeon Crawler Carl said:

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Just cut income taxes spending and be done with it.

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FIFY

tysker said:

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Quote:

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Under UTMA the recipient carries forward the cost basis. It's generally used to directly transfer investment assets. So the minor ends up owing significant capital gains when they sell those investments.

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Which is why you often want transfer you higher cost basis stock to your kids, or just deposit cash.

Couldn't Congress simply pass a law to change the tax status of the cost-basis and accomplish a similar goal? That's what I'm getting at. We already have investment vehicle frameworks for this; I'm not sure why we need another one.

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Ultimately this is not about how to get middle class and upper middle class kids into investment accounts.

This is to get lower income and lower class into investment accounts. I posted earlier one of the big talking points is that the stock market is this thing that only the wealthy have access to. It's a BS claim, but it talks well. Creating this takes away that talking point.


I think the broader point though... It's an investment in America. Even if you only get ~10% participation beyond the initial investment you're looking at a good chunk of change going into the markets.

I've seen the question posed before and we haven't seen clear answers. We're about to enter a period where the first batch of 401(k) contributors will be selling. 401(k) have offered a lot of continued buying pressure throughout markets. That's a paradigm shift as every year more and more of these accounts are rolling into non-contributory and selling/distributions. Eventually it'll be a net breakeven I suppose?

Kenneth_2003 said:

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I thought the parents contribution (and any employer contribution) was an after-tax contribution, being treated more like a ROTH account.

So the parent's after tax contribution is then taxed on the kids side as ordinary income?

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No, that's why I said, "almost". The parents' after tax contribution is not taxed when withdrawn, but the growth is still taxed as ordinary income when withdrawn. Employer contributions are pretax and taxed as ordinary income when withdrawn. The difference between this and a Roth is that the growth of the Roth is untaxed when withdrawn, but here the growth is taxed as ordinary income.

It's basically the worst of all worlds. You pay tax on the contribution. Your kids pay ordinary income tax on the growth instead of capital gains. It's locked up until your kids are 59 1/2 except for qualifying events. It has to be in a qualifying, market indexed ETF. It has all the restrictions of an IRA without the tax benefits of a traditional and without the untaxed growth benefits of a Roth.

tysker said:

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Dungeon Crawler Carl said:

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Just cut income taxes spending and be done with it.

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FIFY

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You know thats not going to ever happen.

ABATTBQ11 said:

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Kenneth_2003 said:

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I thought the parents contribution (and any employer contribution) was an after-tax contribution, being treated more like a ROTH account.

So the parent's after tax contribution is then taxed on the kids side as ordinary income?

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No, that's why I said, "almost". The parents' after tax contribution is not taxed when withdrawn, but the growth is still taxed as ordinary income when withdrawn. Employer contributions are pretax and taxed as ordinary income when withdrawn. The difference between this and a Roth is that the growth of the Roth is untaxed when withdrawn, but here the growth is taxed as ordinary income.

It's basically the worst of all worlds. You pay tax on the contribution. Your kids pay ordinary income tax on the growth instead of capital gains. It's locked up until your kids are 59 1/2 except for qualifying events. It has to be in a qualifying, market indexed ETF. It has all the restrictions of an IRA without the tax benefits of a traditional and without the untaxed growth benefits of a Roth.

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Gotcha...
Ok. Yes, I agree this is then the worst of both worlds if parents contributions are taxed as ordinary income on withdrawal. The better thing would be for the parents to simply create a custodial brokerage account under current IRS gift exceptions.

Gosh, I used to know a guy (over a decade ago now).. He and his wife got money from his grandparents at Christmas. 12.5K each from each. Merry Christmas, here's 50k, this year and next year and the next and the next and...

Kenneth_2003 said:

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ABATTBQ11 said:

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Kenneth_2003 said:

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I thought the parents contribution (and any employer contribution) was an after-tax contribution, being treated more like a ROTH account.

So the parent's after tax contribution is then taxed on the kids side as ordinary income?

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No, that's why I said, "almost". The parents' after tax contribution is not taxed when withdrawn, but the growth is still taxed as ordinary income when withdrawn. Employer contributions are pretax and taxed as ordinary income when withdrawn. The difference between this and a Roth is that the growth of the Roth is untaxed when withdrawn, but here the growth is taxed as ordinary income.

It's basically the worst of all worlds. You pay tax on the contribution. Your kids pay ordinary income tax on the growth instead of capital gains. It's locked up until your kids are 59 1/2 except for qualifying events. It has to be in a qualifying, market indexed ETF. It has all the restrictions of an IRA without the tax benefits of a traditional and without the untaxed growth benefits of a Roth.

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Gotcha...
Ok. Yes, I agree this is then the worst of both worlds if parents contributions are taxed as ordinary income on withdrawal. The better thing would be for the parents to simply create a custodial brokerage account under current IRS gift exceptions.

Gosh, I used to know a guy (over a decade ago now).. He and his wife got money from his grandparents at Christmas. 12.5K each from each. Merry Christmas, here's 50k, this year and next year and the next and the next and...

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The parental contribution is untaxed on withdrawal, but the growth on the account is taxed, unlike the Roth

As an example, if you bought a $100/share ETF that increased to $250 by the time of withdrawal, the $150 of growth would be taxed as ordinary income and the $100 contribution would be untaxed. In a Roth, the entire withdrawal is untaxed.

This sounds good. I just wonder how much increase in tuition this will cause.

I get that.
It's cheaper that that point to set up a traditional brokerage account and pay capital gains in the growth vs the growth getting taxes as ordinary income.

The contribution limits are well below taxable gift limits.

The only benefit is the govt seed money and the employer contribution. That and distributions for qualified purchases IF they get better tax treatment

Surprised it has gone unmentioned so far that:

• 50% of stock market is owned by top 1% of earning households
• 90% is owned by the top 10% of earning households, and,
• >99% of the market is owned by the top 50% of earners...
• Meaning the bottom 50% of earners - half the country - hold no assets and are 100% exposed to inflationary pressure and debt.

These accounts are a combination means to many ends, including:

• expanding the participation of the US equity markets to more Americans without having a direct government entitlement dole, i.e. push more wins back to Main Street,
• create exposure to asset ownership to create 'skin in the game' for our capitalistic economy,
• act as a "gentle tax" by creating a new future revenue stream when funds begin to be withdrawn,
• create a small incentive to have children,
• create a new multi-billion (multi-trillion?) dollar investment fund to buoy the equity markets,
• match philanthropic ultra high net worth families with a new form of endowment giving managed by US Treasury.