Infants Savings, Looking for Advice

[BoostJunky]

Hi Everyone

My daughter is 15 months old now and we setup a savings account for her in a local bank. The interest is terrible and there has to be a better way to compound this money. We have about $2000 in there now. I was thinking of opening a Roth IRA under my name for her, would that work? Any suggestions? The 1% interest a year is a joke.. and I'd imagine through birthdays etc over the years we could contribute $50 a month or so.

[seattlecyclone]

Your infant doesn't qualify for her own Roth IRA until she has some earned income. You could contribute more to your own Roth IRA, but then you would have to track what percentage is "yours" vs. "hers."

Two more common investment accounts for minors are UTMAs (general-purpose taxable investment account in your kid's name with you as custodian until 18/21) or 529s (gains tax-free if used for college, taxed more than a taxable account otherwise).

[BoostJunky]

Your infant doesn't qualify for her own Roth IRA until she has some earned income. You could contribute more to your own Roth IRA, but then you would have to track what percentage is "yours" vs. "hers."

Two more common investment accounts for minors are UTMAs (general-purpose taxable investment account in your kid's name with you as custodian until 18/21) or 529s (gains tax-free if used for college, taxed more than a taxable account otherwise).

Seattle, thanks for the info.

Do you know the best route for opening a UTMA (lowest fee's etc)? I see BOA offers one.

[seattlecyclone]

I really haven't looked into it because we haven't seen fit to open one for our son (yet), but I see that Vanguard offers one. I'd probably go with that one unless there's some hidden fees I'm not seeing at first glance.

[spooky105]

Worth looking at account ownership -- with the UTMA, the child will eventually have control over the account and can spend the money on anything (which may or may not be a good thing depending on maturity, size of the account, etc.).

With a 529, you retain control and can change the beneficiary to another family member (such as a spouse or if you have another child and need to re-allocate funds based on life plans, scholarships, etc.). The funds can be used tax-free for pretty much any post-secondary education, including vocational programs. Money can also be withdrawn penalty free for a variety of reasons (though unlike for education, it is taxed as income) if the funds are not needed due to scholarships.

Tax-wise, a 529 functions like a Roth IRA for education, so you get the benefits of tax-free compounding. Your state may also offers tax benefits for 529 contributions. With a UTMA, the child may have to pay taxes as the account value grows (above $1,050 in unearned income) and can get hit with the "kiddie tax" (taxed at parents rate above $2,100 of unearned income).

We opted to create 529 accounts with Vanguard for both our kids.