<p>I live in New Jersey and have an UTMA account for my high school senior. He's going to college next year and I'd like to start spending his expenditures (e.g. airfares, laptop, etc.) from this account. Since he's only 18 and in NJ he doesn't own this asset until 21, what's the best way to do this? Should I </p>
<p>a) just keep withdrawing from this account; or</p>
<p>b) close the UTMA account and transfer the cash to a new checking account under my name; or</p>
<p>c) close the UTMA account and transfer the cash to a new checking account under my son's name</p>
<p>What are the pros and cons, and the tax consequences of each approach? As you can tell, I'm really confused about the tax rules on UTMA. Any advices will be greatly appreciated.</p>
<p>An UTMA is owned by your son. Because it is in an UTMA, you as the trustee can restrict his access until he is 21, but it is his money.</p>
<p>So option B is not really legal, it would be transferring his money back to you (becoming your asset on FA forms), although in all honesty you will never get caught.</p>
<p>You could do either a) or c), although for c), if you pull it out of the UTMA, he can legally get access to it. If he decides to use it to buy a car or whatever, you can’t stop him. If your relationship is strong, this shouldn’t be a problem.</p>
<p>The only tax consequences happen when you sell assets in the UTMA. Any income generated by this belongs to your son and would need to be reported by him on his tax return, if he has to file.</p>
<p>As advised above, you can do a) or c) for any pre-college expenses. If you want the UTMA funds to be used for college, then consider doing:</p>
<p>d) a trustee-to-trustee transfer from the UTMA to a UTMA/529 owned by your son. The title remains the same (child owns the account, parent is custodian until child turns 21 in your state, child is beneficiary). The 529 funds will be invested tax-free and can be used for qualified higher education expenses, including travel to/from college. I believe the new rules allow a laptop purchase as a qualified expense.</p>
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This also has the advantage that the 529 UTMA assets are counted as parent assets (assessed a max of 5.6% for financial aid) vs. a regular UTMA being counted as the student’s asset (assessed 20% for financial aid).</p>
<p>The disadvantage is that when you move the money, you have to cash out the UTMA, and if the UTMA was invested in something that has increased in value (stocks for example), that income will have to be reported as student income, and taxes will have to be paid on the earnings.</p>
<p>If the stock market did to your kid’s UTMA what it did to mine, this might not be a problem. :)</p>
<p>It’s true that taking capital gains means the student reports income on FAFSA and pays taxes on that income. That’s a good thing to plan for prior to the 2nd half of the student’s junior year of high school. But it also might not be an issue; there’s a student income protection allowance of around $5000 for FAFSA, so if the capital gains + other student income is under that amount then it won’t affect EFC.</p>
<p>Thanks, notrichenough and vballmom, for your advices.</p>