Saving for a child's Financial Future (FI, College, anything?)

[whitedragon]

My wife and I recently welcomed our new daughter to the world, and so I was excited to jump on the 529 train and dump as much extra money as I could into it.  However, then I started thinking about not wanting that money to be "locked up" for school only, and what if the kid decides she doesn't want to go to college, or college doesn't exist in 18 years, or anything really?!

Then I was thinking about what my savings "goals" were for my child, and I think I want to give them a great head start towards their own FI journey if they choose.  But the issue there is, maybe I don't want to hand over a huge chunk of money to essentially a teenager without keeping a little bit of control.

Then I thought about just saving more money in my own accounts, and then just give the child money as necessary, but that seems even worse than the above, and also triggers other taxable events for me depending on where that money is saved.

So I guess, I don't know what to do, or even if I'm asking the right questions.

What's the best way to save money for a child's future at all?

Thoughts?

[Sugaree]

I have the same concerns about the 529, combined with the fact that I don't at all trust my state to not FUBAR their 529 the way they did with their pre-paid college plan.  There's also a better than zero chance that my in-laws have or will set up an educational trust for him.  So, I'm using a Roth IRA for college savings.  Yes, I know that it's tax-advantaged space that I could be using for retirement, but if he decides to go to community college instead of a 4 year university, or doesn't go to college at all, or has enough from his grandparents, then I don't have to jump through hoops to use that money for my retirement.  Once I get to a position where I'm maxing out my TSP and the IRA (plus my husband's accounts) then I might look at a 529.  But I'm not there yet.  And I don't know if I'll ever get there.

As far as starting him off for the future, I'm starting with teaching him to save.  And he's pretty good at it.  In fact, just last night he got $20 from my mom for Valentine's day (WTF?  I never got cash for Valentine's Day.  Who are these people?).  Mom told him he could spend it on whatever he wanted and he told her he wanted to put the whole thing in his savings account.  Be still my heart.  We've talked a little about investing and he understands the concept (and charges his dad loan shark-like rates to borrow money (DH is....not so good....with money). 

I would like to start an IRA for him just as soon as he has income.  Unfortunately, I live in a state that does not exempt the children of business owners from child labor laws, so even if I pay him to help with some of my side gigs, I can't legally hire him for another 9 years.  I know that there are a few people around here who have a monetized blog and pay their children as models for the blog. 

[FIRE@50]

First of all, congratulations on the baby girl!

Second, I'm happy to throw money into a 529 plan for my daughter. I have no fear of her not going to college after high school. I also throw a little bit of money into savings bonds each month in her name so that she will have a little cash available. I know this isn't the greatest investment but I still like it.

As far as any other concerns I have about giving money to a young adult, I can't imagine her growing up in a home with us and seeing me FIRE before she goes to college and her not having an excellent understanding of personal finance. We have always been fairly open with her about how money works. We talk about what things cost, what it means to earn money, and also not to assume someone has a lot of money just because their house is bigger, etc.

Another concept that I really like but haven't started doing yet is opening a Roth IRA in your child's name and funding it. They do need income of their own to pull it off, but it seems like a great way to gift them money while also teaching them about saving for retirement.

[AMandM]

There's always going to be a trade-off for having more control.  You get the tax advantages when you give up some control.  At this stage I think the control is worth it. Even with our excellent childrearing, there's no guarantee that in 18 years your daughter will be ready to handle a large windfall responsibly.

Since your daughter is still so young, you can just set up a savings/investment account in your own names but earmark it mentally for her.  If you have more children later on, you could create more such accounts or just consider that one the "children's fund."  As your daughter gets older, and her future and her character become clearer, you can move money into a 529 if that seems likely to be useful, or into a Roth IRA, or into a joint account with her, or whatever.

[trollwithamustache]

with recent changes, 529 can also be used for private High School if thats on the radar. 

Will you FIRE before college? if so, the tax benefits of a 529 may be muted. (ie, you put the money in an index fund, and have very low income the years you take the capital gains cash out to pay tuition)

[CindyBS]

The other thing about 529's is they typically become much more conservative investments as the child ages.  Which is prudent if you are counting on the money and have no stache or flexibility with accounts, but it stinks when your kids are teens and the stock market is doing well but the 529's aren't earning much.

I have teenagers myself, and we have very little in their 529's.  However, by the time they graduate High school, we will have a paid off house, a substantial stache, a huge savings margin, and will be almost FI.  I am very happy we did this as my oldest son is most likely going to need to do community college due to some medical issues - things we did not know about when he was young. 

We have also incentivized minimizing college expenses by telling the kids part of their college money could be used for things like a car, downpayment for an apartment, downpayment on a house, etc. if they save money by getting college credits in HS and be willing to do some community college.   You cannot pay for things like a car out of a 529.

Congrats on the new baby!

[The_Pretender]

PTF...

Similar situation.  We just had a baby the past year and grandparents have asked what would be best.  Their FA advised them on 529s, but they were concerned about the limitations of only for education.  Depending on where you live, my understanding was the 529s can now be used for private school after the tax law was passed last year.  This is at the Federal level, so may need to check with States.  I know a lot of States were caught off guard with the rule change...  I have not followed up with this law change lately, but it was talked about a lot a year or so ago.

Is it possible to set up a taxable account in your kids name and make deposits into their account?  I have wondered about this as an option, We currently have any gifts of cash to the baby going into a savings account we set up at our bank (in our name).  Knowing the power of compounding interest, It would be nice to get this cash working harder earlier for the baby. 

I received several savings bonds from my grandparents.  It was nice windfall of a few hundred bucks here and there.  Knowing that if invested in an index at the time of purchasing the bonds, I would've had more $$ than the bond maturity. 

Another thing my parents did for me growing up.  I started working at 14 and every year at tax time, My dad would double my tax return and put the $$ in an IRA.  So, say I would get a $750 tax return, he would put $1,500 into my IRA. He would keep the refund.  By the time I was finished with college, I had a size-able IRA.  I used this IRA to help me with a down payment on my first house a year out of college.

[Chrissy]

Use a 529.  Do your research, but use a 529.  To address some of your specific concerns:

Control
You're the owner!  It's not handed over to them at 18 like some other vehicles.

Community College
Your daughter can use the money for accredited schools including vocational school, community colleges, universities ABROAD, grad school, and private high school (depending on your state).  And, as long as she's enrolled at least half-time, your daughter can pay for her dorm, her meal plan, her off-campus apartment/gas/electric/sewer/water/trash and food up to the college's COA limit.  Also her computer, internet access, books, fees, and other equipment.

College Doesn't Exist In 18 Years
Dude... 

Accredited online programs are qualifying expenses right now, so never fear.

She Doesn't Go to College
You can transfer the money to another child's account, or even change the beneficiary to a grandchild.  And, by the way, funding your grandchildren's college expenses is an excellent way to assist your CHILDREN to financial independence without handing them gobs of money when they're 18.

Locked Up
If a withdrawal is made for a non-qualifying expense, the taxes and penalty apply only to the earnings (not the contributions), and are incurred at the beneficiary's rate.

Regarding taxes, I don't understand the comment from Troll.  In our state, we get a tax-deduction from our state income tax for the money we contribute every year.  But, even if you don't get a tax credit up front, the money grows tax-free and is NOT subject to capital gains on earnings when you withdraw for qualifying expenses. 

Would You Even Have Enough In There???
How much do you even have available to contribute every year?  In-state tuition, room, board, books, and other fees for undergraduate studies at the 4-year state university my husband attended is now $29k/yr.  My alma mater is $24k/yr.  Double what our parents paid 20 years ago.  If it doubles again by the time my kids go (they are 3yrs and 1yr), we'll need $240k get one kid one Bachelor's degree.  We aim to have half per kid in 529s just in case we're wrong about the overall price.

[ThatGuy]

This isn't something you could do now but worth thinking about for the future.  There are other articles covering this subject that might be more informative but this is one I had in my news feed.

https://www.marketwatch.com/video/explainomics/how-to-turn-your-teen-into-a-millionaire/F28393CE-EE26-4B8D-9E7E-01681475E9B4.html

[whitedragon]

Thanks for the replies everyone.  It seems like there really isn't any silver bullet.

Am I perhaps thinking about this the wrong way, and instead should just include any money I decide to give my child as part of my "expenses" in FI?

That way I can just think of it as an increase to the amount I need in my 'stache, and then just think of tax advantages/efficiencies to look for in regards to just being able to save more?

[Car Jack]

Does your state give you a tax break for putting money into a 529?  If not, don't put any money in.  How about US Savings bonds?  You will always get the interest state tax free and if you use the money towards educational expenses, you won't pay Federal tax either (with income restrictions).

I'll include myself as thinking that a newborn today very well may not be going to traditional colleges.  I have one son taking community college classes while in high school, the other in literally 3 colleges at once (cc and state college courses transfer to his private college) plus he's taking a free, online course at this podunk college called Princeton.....who ever went there?  Einstein?  If he wants credit for the course, he sends $50. 

Look at employment.  I'm an engineer and have been for over 30 years.  If you're a EE or software engineer, the biggest booms are in Bangalore, India and China and the Megacorps are closing down US based design centers and staffing up in these low cost areas with government sponsored colleges for engineers.  Will these jobs even exist in the US in 20 years?  If I were starting college today, myself, I'd become a plumber.  No.....really.

[Sugaree]

  If I were starting college today, myself, I'd become a plumber.  No.....really.

I'm actually hoping my kid will find a trade that he's interested in (other than welding...I work with an industrial hygiene clinic so I've got a good idea what welders are exposed to).  Right now he says that being an electrician is dangerous and a being a plumber is gross, so I don't know if it will happen.  Right now he says he wants to be a Walmart worker (he's five).   I hope he changes his mind.  One thing I would like to see though, is trade school focusing a little more on the business aspect of having a trade.  I'd like to see a requirement of at least the intro to accounting, finance, and maybe marketing.  Trades are great, but they can be hard on the body.  If you have some business acumen then 20 years down the road you can be the owner who subs out jobs to the younger guys and girls coming up behind you.  Or FIREd. 

[Unique User]

If your state does not have tax advantages to a 529, I'd fund a Roth before the 529.  If you have access to a mega backdoor Roth even better.  Much more flexibility on the dollars as they can be used for retirement or college.