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My father-in-law opened a mutual fund UTMA for my two kids when they were little and has made periodic contributions over the years. They're high school and college now. Each account has about $10k in it, about half is unrealized capital gains.

The problem is that the fund he selected is awful with outrageous fees. I've known this a long time, but he would have been very offended if I tried to meddle so I've just let it go. After all, it's his generosity.

My oldest is turning 18 this year, going to college, and I've diplomatically used this as an excuse to mess with the UTMA accounts, so there's an opportunity to move the money into a better long-term choice.

How do we best avoid the Kiddie Tax on the capital gains? My kids don't need the money, I'd like to have them sock it away in VSTAX or similar and pay minimal fees.

I don't mind taking a few years to do this. One idea I had was to sell $2k-4$k of stock each year (generating $1k-2k capital gains, close to the Kiddie Tax limits), move the funds to a new taxable account and advise them to buy a nice index fund.

Is that a sound strategy? Any better options?

Edit: Assume they have no other income or income from summer jobs is very low, $1-2k at most.

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    Contributions to any kind of IRA require taxable compensation (salary, wages, commissions earned by salesmen etc, but not capital gains, interest, dividends etc) which your children don't have, and so please don't open IRAs in their names unless they are earning money babysitting, mowing lawns, tossing hamburgers etc, and then they are limited to $5500 or total compensation, whichever is less. – Dilip Sarwate Jul 5 '18 at 20:49
  • Ah, good point.They do have summer jobs. – Rocky Jul 5 '18 at 21:27
  • Earning money and paying taxes on it, of course. If they're doing that, you might add that to the question (how much, in particular, and if any of it is already going to an IRA or similar). – Joe Jul 6 '18 at 15:48
  • They are well under the income tax limits. Lets forget the IRA part -- just want to know how to move the money out of this bad fund without triggering excessive capital gains taxes at the wrong marginal rates. Lets assume no other income to make it easier. I'll adjust the question. – Rocky Jul 6 '18 at 16:53
  • Basically my idea was if they aren't paying income taxes yet because they're not working and still in school, there might be a way to effectively step-up their cost basis by selling and re-buying a different fund, even if it's just $1k per year for a few years. – Rocky Jul 6 '18 at 17:03

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