Author Topic: Investing for my kids  (Read 2677 times)

87tweetybirds

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Investing for my kids
« on: October 19, 2017, 09:10:02 PM »
Hey MMMers,
Sorry if there's already a post about this, if so please direct me there.
My DD is 2, and since she was born we've been saving about $100 a month in a savings account. It's finally reached nearly $2000, and I'd like to put it somewhere it can earn more interest. I've been investigating the 529 option, and it looks like a good option as long as she decides to get a higher education(something we do plan on strongly encouraging). I especially like that it can be a tax deduction, and no taxes paid on withdrawal either. I just don't want any savings we've socked away for her to count against her when it comes to scholarships and financial aid, or to have it count as minimally as possible. I was able to get through my Bachelors degree with no student loans and mostly paying for housing, food and books from my savings and jobs, and am hoping that she will also be able to receive scholarships to help her do the same.
I guess my question is if we invest the saved money into a 529, will it count against her when the time comes to apply for scholarships and financial aid? And what if she is able to get a full ride scholarship, what kind of options would the 529 have as far as being able to use it for other things.
-My parents had purchased stock in my name, and when I didn't use it for school I was able to use it to help with a down payment for a house just as the housing market started to recover in my area, which has turned into about a 33% return on my investment as we are preparing to sell said house. I don't want to put this money into an account that should she be fortunate enough not to need for school won't be able to be used for other opportunities.

What thoughts? Ideas? Suggestions?

waltworks

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Re: Investing for my kids
« Reply #1 on: October 20, 2017, 08:48:47 AM »
A 529 is really only useful if you have already filled up other tax advantaged (IRA, 401k, etc) space. It should probably be your last priority, because there are many other ways to save tax-advantaged money - and money is fungible, so you can help pay for DD's education regardless of whether you have a 529 or not.

Regardless, get that $2k *invested*, a savings account is just money storage, not investing. You have some time for that money to grow, you probably want it in the most aggressive (90+% stocks) vehicle you can.

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OutOfTheAbyss

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Re: Investing for my kids
« Reply #2 on: March 21, 2018, 02:44:24 PM »
We are trying to figure out the same thing. I'm not keen on the school fund because higher education is not what it used to be and it's limiting. I would rather have my child later be able to buy income producing property, etc. I am trying to decide what to do with this as well- we've been tossing around the cash life policy idea, then there's always the stock market. I am also looking at buying some investment property and was thinking about a land or other trust but don't know that much about it.

reeshau

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Re: Investing for my kids
« Reply #3 on: March 22, 2018, 11:12:42 AM »
I'll check in with a pro-529 opinion.  It's great that you are thinking of this so young.  At 2, you have 16 years before you need to use this money:  plenty of time for the investment to compound.  This is where the tax treatment really comes in handy vs. a taxable account.

As for retirement accounts, it is true that you should take care of yourself first, because nobody will give you a retirement loan.  But, if you are looking to use your retirement funds to fund a child's college, then I would ask where will your retirement be?  Most people aren't saving enough in retirement for both:  even Mustachians face contribution limits.

As for other accounts, custodial accounts can have lower tax rates, but can severely limit the possibility of (need-based) scholarships.  Regular taxable accounts are, of coursed, taxed at the parents' higher tax rate.  Even if your investment strategy means this is all at the capital gains rate, you need to adjust your savings target up to compensate.

One point of caution in your story:  you mention tax deductible.  529 contributions are *not* deductible at the Federal level.  Many are deductible at the State level, but some are not, and the level varies.  (and most often, limits you to your State's plan)  Research this carefully before depending on the information.

One positive:  529's are applicable to many types of education, not just for 4-year colleges.  Your child probably needs some skills beyond high school to have a good career.  With the new tax laws in place, that can include K-12 education, too.  (thought that blunts the benefit of compounding)

Regarding having too much, either through choice or scholarships:  You can withdraw funds from your 529 in the amount of your child's scholarship without the 10% penalty.  (although not tax free) So if they achieve, no harm no foul.  If they find a life path that does not require formal schooling, you can also name a different, related beneficiary:  a sibling, a niece / nephew, or even yourself!

I started my 529 when my son was 0.  (the year before he was born)  Living in Michigan, we have a $10,000 tax deduction in a State that is stingy with them.  (at 4.25% tax rate)  I am contributing that limit until he turns 5.  By the time he is ready to go to college, we should be well within reach of paying for it--I expect $100k-150k.  I call it The Price Is Right Strategy--trying to come close, without going over.  If my son chooses something other than college, and I have no other uses for the money, I will gladly withdraw it, even with penalty, seeing it as a bonus for having achieved the growth of a child with less resources than planned.


Kay-Ell

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Re: Investing for my kids
« Reply #4 on: April 27, 2018, 02:52:16 PM »
I've done some reading sugesting using a Roth IRA as a college savings vehicle.  There are two ways to do this.  The first is to open a Roth IRA in the name of the parents, contribute up to the max each year (5,500), and then when it's time to pay for college you can pull out any or all of your contributions without penalty and without restrictions.  Because it's a Roth, it was already taxed at the time you contributed it, so no additional taxes are incurred if you're only pulling out what you put in.  You can also pull out any of the earnings for a qualified expense (such as education), without penalty but you do have to pay taxes.  There isn't a lot of benefit to doing this, unless your child decides not to go to college, in which case your savings just pad your retirement and you go about your business.

However there is another options (my personal favorite).  Open up a Roth IRA in your child's name.  Contribute up to $5,500 per year, which would have to represent his or her income.  I believe you'd have to 1099 your child, which is easy enough to do if the parent's own their own business.  At this point the child's income is low enough that there is no income tax. So by the time college comes around, the child can pull out any of their contributions tax and penalty free, plus any of the earnings penalty free (but would be subject to tax).  If their income in college is low enough, it's also possible they could escape paying taxes on the earnings they withdraw.  Anything not used for education can grow for their retirement.  In addition, up to 10k can be withdrawn for the purchase of their first house.  And if it turns out their not interested in education, home purchases or retirement - then at least your contributions were tax free, and the earnings are subject to the same 10% penalty upon withdrawl.

You can't beat a 529 if you're sure it will be used for education.  But if you're unsure, and you want the flexibility, you can achieve most of the benefits of a 529 with a Roth IRA. 

Cubert

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Re: Investing for my kids
« Reply #5 on: April 30, 2018, 05:23:13 AM »
I had been investing about $75 per kid in a 529 up until a few months back. There was a post from GoCurryCracker that changed my mind completely on 529s. I now put that money directly into an IRA instead. By the time the kids graduate high school, I'll be 59 and ready to access those dollars without penalty anyhow. Regardless what age you'll be when your kids are ready for college, consider other alternatives before going down the fairly restrictive 529 path. Best!

87tweetybirds

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Re: Investing for my kids
« Reply #6 on: July 29, 2018, 05:09:03 AM »
 
A 529 is really only useful if you have already filled up other tax advantaged (IRA, 401k, etc) space. It should probably be your last priority, because there are many other ways to save tax-advantaged money - and money is fungible, so you can help pay for DD's education regardless of whether you have a 529 or not.

I'm on track to max out my 401k, and barring any catastrophic emergencies should be able to max the IRAs as well, DH just got a job that has a 401k, and won't qualify to start contributing until November. We don't qualify for a HSA, so other than the 529 I think that we're as maxed on tax advantaged money as we can be right now.


I started my 529 when my son was 0.  (the year before he was born)  Living in Michigan, we have a $10,000 tax deduction in a State that is stingy with them.  (at 4.25% tax rate)  I am contributing that limit until he turns 5.  By the time he is ready to go to college, we should be well within reach of paying for it--I expect $100k-150k.  I call it The Price Is Right Strategy--trying to come close, without going over.  If my son chooses something other than college, and I have no other uses for the money, I will gladly withdraw it, even with penalty, seeing it as a bonus for having achieved the growth of a child with less resources than planned.


I know its not a Federal tax deduction, but it is for my state, up to $12,000 a year(at this point in time we won't be able to get up to that). As our income increases I hope to increase this contribution.

I had been investing about $75 per kid in a 529 up until a few months back. There was a post from GoCurryCracker that changed my mind completely on 529s. I now put that money directly into an IRA instead. By the time the kids graduate high school, I'll be 59 and ready to access those dollars without penalty anyhow. Regardless what age you'll be when your kids are ready for college, consider other alternatives before going down the fairly restrictive 529 path. Best!

I didn't realize minors could have roth IRAs, I'll look into that more. Thanks. I opened a 529 for DD1 a few months ago, and have started saving up enough to open another for DD2(born in April).



reeshau

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Re: Investing for my kids
« Reply #7 on: July 30, 2018, 06:50:49 AM »

I had been investing about $75 per kid in a 529 up until a few months back. There was a post from GoCurryCracker that changed my mind completely on 529s. I now put that money directly into an IRA instead. By the time the kids graduate high school, I'll be 59 and ready to access those dollars without penalty anyhow. Regardless what age you'll be when your kids are ready for college, consider other alternatives before going down the fairly restrictive 529 path. Best!

I didn't realize minors could have roth IRAs, I'll look into that more. Thanks. I opened a 529 for DD1 a few months ago, and have started saving up enough to open another for DD2(born in April).

Kids can't have IRA's unless they have earned income.  But, I think Cubert is talking about a traditional IRA in his name, since he mentions he'll be 59 to access the money.  (really, you need to be 59 1/2--so born after June, you have to bump a year)  One thing to watch with this approach:  this means your taxable income will get a boost from these withdrawals, which would not happen with a 529.  If you are playing income games with the ACA, managing to 0% capital gains tax, or otherwise looking for need-based scholarships, this approach could be counter-productive.

87tweetybirds

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Re: Investing for my kids
« Reply #8 on: July 31, 2018, 03:20:58 AM »

I had been investing about $75 per kid in a 529 up until a few months back. There was a post from GoCurryCracker that changed my mind completely on 529s. I now put that money directly into an IRA instead. By the time the kids graduate high school, I'll be 59 and ready to access those dollars without penalty anyhow. Regardless what age you'll be when your kids are ready for college, consider other alternatives before going down the fairly restrictive 529 path. Best!

I didn't realize minors could have roth IRAs, I'll look into that more. Thanks. I opened a 529 for DD1 a few months ago, and have started saving up enough to open another for DD2(born in April).

Kids can't have IRA's unless they have earned income.  But, I think Cubert is talking about a traditional IRA in his name, since he mentions he'll be 59 to access the money.  (really, you need to be 59 1/2--so born after June, you have to bump a year)  One thing to watch with this approach:  this means your taxable income will get a boost from these withdrawals, which would not happen with a 529.  If you are playing income games with the ACA, managing to 0% capital gains tax, or otherwise looking for need-based scholarships, this approach could be counter-productive.

Thanks for that clarification. In which case, I'm back to 529s after we've maxed out our retirement accounts.

Kay-Ell

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Re: Investing for my kids
« Reply #9 on: July 31, 2018, 12:10:21 PM »

I had been investing about $75 per kid in a 529 up until a few months back. There was a post from GoCurryCracker that changed my mind completely on 529s. I now put that money directly into an IRA instead. By the time the kids graduate high school, I'll be 59 and ready to access those dollars without penalty anyhow. Regardless what age you'll be when your kids are ready for college, consider other alternatives before going down the fairly restrictive 529 path. Best!

I didn't realize minors could have roth IRAs, I'll look into that more. Thanks. I opened a 529 for DD1 a few months ago, and have started saving up enough to open another for DD2(born in April).

Kids can't have IRA's unless they have earned income.  But, I think Cubert is talking about a traditional IRA in his name, since he mentions he'll be 59 to access the money.  (really, you need to be 59 1/2--so born after June, you have to bump a year)  One thing to watch with this approach:  this means your taxable income will get a boost from these withdrawals, which would not happen with a 529.  If you are playing income games with the ACA, managing to 0% capital gains tax, or otherwise looking for need-based scholarships, this approach could be counter-productive.

Thanks for that clarification. In which case, I'm back to 529s after we've maxed out our retirement accounts.

Kids can have earned income from their parents, once old enough to reasonably help with things like yard work, baby sitting, or a family business/side hussle.  And for the people using the traditional IRA in their name, assuming 59 1/2 when kids start college, yes your taxable income will increase, but tuition is tax deductible up to 4k per year.  There may be some value in spreading your savings out across different savings vehicles.


87tweetybirds

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Re: Investing for my kids
« Reply #10 on: August 01, 2018, 02:05:31 AM »

I had been investing about $75 per kid in a 529 up until a few months back. There was a post from GoCurryCracker that changed my mind completely on 529s. I now put that money directly into an IRA instead. By the time the kids graduate high school, I'll be 59 and ready to access those dollars without penalty anyhow. Regardless what age you'll be when your kids are ready for college, consider other alternatives before going down the fairly restrictive 529 path. Best!

I didn't realize minors could have roth IRAs, I'll look into that more. Thanks. I opened a 529 for DD1 a few months ago, and have started saving up enough to open another for DD2(born in April).

Kids can't have IRA's unless they have earned income.  But, I think Cubert is talking about a traditional IRA in his name, since he mentions he'll be 59 to access the money.  (really, you need to be 59 1/2--so born after June, you have to bump a year)  One thing to watch with this approach:  this means your taxable income will get a boost from these withdrawals, which would not happen with a 529.  If you are playing income games with the ACA, managing to 0% capital gains tax, or otherwise looking for need-based scholarships, this approach could be counter-productive.

Thanks for that clarification. In which case, I'm back to 529s after we've maxed out our retirement accounts.

Kids can have earned income from their parents, once old enough to reasonably help with things like yard work, baby sitting, or a family business/side hussle.  And for the people using the traditional IRA in their name, assuming 59 1/2 when kids start college, yes your taxable income will increase, but tuition is tax deductible up to 4k per year.  There may be some value in spreading your savings out across different savings vehicles.

My kids are 3 and 4 months. At what age would you call old enough to reasonably help? At this point the toddler "helping" is so many times the opposite. ;) (I encourage her to help when I can because I want her to learn how to do things independent of me.) Providing them with income towards a retirement account sounds like a good teaching tool.

reeshau

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Re: Investing for my kids
« Reply #11 on: August 01, 2018, 03:57:37 AM »
Earned income is a specific definition:

"Earned income only applies to wages and salaries your child receives as a result of providing services to an employer, even if only through a part-time job."

https://turbotax.intuit.com/tax-tips/family/tax-filing-requirements-for-children/L8ice6z0K

In practice, if your child opens and funds an IRA, the custodian will report that to the IRS.  The IRS will expect a report on wages  (W-2, if not a tax return too) that will at least equal the IRA contribution amount.

I don't know enough about business ownership / reporting at a young age to say what the requirements would be if your child mowed lawns or babysat for money.  In my own experience, that was always informal money: never taxed, so never look at for tax advantaged accounts.

pressure9pa

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Re: Investing for my kids
« Reply #12 on: August 09, 2018, 12:10:07 PM »
One note on 529s, some states heavily incentivize the contributions up to a certain point.  Here in Indiana, we get a 20% credit for contributions up to $5000.  Thus every year it's as if for my $5k contribution, the state reimburses me $1000.  Depending on where you live, that can change the IRA/529 decision a bit.