UTMA 101: how to build inter-generation wealth
Summary
A UTMA (Uniform Transfers To Minors) account provides some tax advantages and is a good vehicle to build inter-generational wealth.
This article shares our thoughts on our UTMA account and our current holdings.
Finally, you will see some of the stocks on our watch list for this account (Apple and Tyson Foods in particular).
What is an UTMA account?
We have a young kid and have created a small UTMA (Uniform Transfers To Minors) account for him. There are good reasons to consider such an account if you are in a similar stage in life.This page from Fidelity (where our account is) provides an informative discussion. Here I will just briefly discuss the aspects relevant to our situation.
For us, UTMA offers tax advantages and the time horizon to accommodate more aggressive investment ideas. Income from UTMA accounts is taxed also, but only the part above $2,200 (as of this writing) is taxed at the rates used for estates and trusts. Assuming a 10% annual return (combining dividends and capital gain), the account can accommodate 100% turnover rates and have no tax consequence when theportfolio size is within $22k. Our turnover is nowhere near 100%, but it is substantially higher than our other accounts.And also because of the smaller size of this account, combined with the fact that we do not need the funds in any foreseeable future, we can bet on our more aggressive ideas with an even more concentrated portfolio, as detailed next.
What are our holdings?
Our current holdings are listed below. Due to the relatively small size of our account and the time horizon, we hold an even more concentrated portfolio. You should tailor your diversification and exposure accordingly.
Source: author.
Source: author.
For performance tracking, these charts used the prices on July 11, 2022 (the date I first published the UTMA account on Seeking Alpha). As can be seen, the UTMA account has consistently outperformed the SPY since then amid extreme market turbulence, despite (probably because of) the fact that it only holds a total of 6 stocks.
It is currently outperforming SPY by a large margin of 10.6% as of Nov 15 (we update the account monthly in the mid of each month). Note our picks yield much higher (3.82%) than SPY (about 1.51%), and the returns reported here were adjusted for dividend yields.
What is on our watch list?
Finally, a few stocks that are on our watch list for this account. As detailed in our other articles, we are always happy to add Apple (AAPL) whenever we have new capital and whenever it dipped below $140 under its current finances. Another stock on our watch list is Tyson Foods (TSN). The current prices ($65) and valuations (only ~7x PE) simply do not make sense to us.
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K