Which accounts to use first

<p>I'm in the position where I have enough saved to pay for all basic costs (tuition, fees, room and board) for my S for his undergraduate studies at the state school he will be attending. The funds are in a combination of a 529 plan, a UTMA account established before 529 plans, a regular mutual fund account, and a bunch of EE bonds purchased almost 20 years ago.</p>

<p>The question I have is should I draw from each of these accounts equally or should I spend from one or more of the accounts first? Family income is too high to get any tax breaks so taxes aren't really much of a consideration, and the UTMA account would not see significant capital gains if the funds in it were sold (one would have a loss).</p>

<p>Congrats on being in such a great position. The rule of thumb is to use funds in the student’s name first. However, since financial aid doesn’t seem to be in the picture anyway, it really doesn’t matter. You might want to take the capital loss on the UTMA in the same year you cash in the EE bonds, just to net out any income to zero in that year. And all other things being equal, keep the highest-earning accounts the longest. If your 529s are in age-based accounts, then the asset allocation is probably such that they’re earning mostly interest (1% at best) and have pretty small upside. Those might be the ones to cash in early.</p>

<p>Do you have other children coming along that will be part of the equation in a couple of years?</p>

<p>I have a D that will be starting 4 years later (HS class of 2015). We have a similar setup for her and about 1/2 of the mutual fund account and EE bonds are allocated for her undergraduate studies.</p>

<p>Isn’t the UTMA gain/loss considered the student’s?</p>

<p>Can the interest on the EE bonds be deducted if they’re rolled over into a 529 or used towards qualified educational costs?</p>

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The interest from the EE bonds is exempted if used for education provided you don’t have too much income…and we do…</p>

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<p>Yes. I was assuming the EE bonds were in the student’s name as well, in which case the income would be offset by a capital loss, both on the student’s tax return. Also assuming cash basis reporting. If the owner of the bond is the parent, then the interest is tax-exempt if used for education expenses if MAGI is under the limit, which you’re saying it’s not. So if the bonds are in the parents’ names then the income is taxable.</p>

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<p>[Individual</a> - Education Planning](<a href=“http://www.treasurydirect.gov/indiv/planning/plan_education.htm]Individual”>Using bonds for higher education — TreasuryDirect)</p>

<p>Edited to add that you can convert a UTMA to a UTMA/529 if that makes sense for your situation. With kids 4 years apart, you won’t benefit from having your EFC allocated 50% to each child as you would if both were attending college in the same year.</p>

<p>If you have some equity exposure in the younger one’s accounts, you might want to consider to start lightening up on that (at least for the funds you will need for undergrad).</p>

<p>Since you will need that money in a few years, you don’t want to have the stock market take a nose dive and you won’t have enough time for the market to recover before you need the funds. </p>

<p>Also, even if the savings bonds are in the child’s name, wouldn’t the interest be subject to the kiddie tax?</p>

<p>Forgot to mention…the savings bonds are not in the child’s name (actually many of them were bought before he was born).</p>

<p>Yech, looks like you are just going to have to pay income tax on the interest earned by the savings bonds over all these years.</p>

<p>I guess taxes are a minor point - you are in the enviable position of having college covered for your two kids. I know it didn’t just happen - it was your planning and sacrificing that made it happen.</p>

<p>Congrats for your foresight and savings ethic.</p>

<p>Yup, we will have to take the tax hit…</p>

<p>We have enough to get the kiddos to state school…but if the S were to go to a private school we would have been taking out significant loans. We will be in the same position with the D although 4 more years of saving will help.</p>