Author Topic: Just opened up accounts for both of my grandsons.  (Read 2970 times)

Miss Prim

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Just opened up accounts for both of my grandsons.
« on: December 25, 2019, 09:43:43 AM »
Hi.  I am a grandma to a 9 year old and 4 year old.  We usually give money every year to our daughter and son.  Son is 33 and single and daughter is 37 and married and has the 2 kids.  My son-in-law loves to spend money like there is no tomorrow, so this year my husband and I decided to give them the same amount we always do, but I just opened UGTM accounts for both kids and put in $1000.00 apiece.  Then we gave my son who is single the same amount plus the $2000 to make if fair.  My son is very thrifty, so the money will be well spent. 

I told my son-in-law that we would get together and buy some stocks that we all can agree on to teach my grandson's about money and investing.  He (SIL) likes to "play" the stock market and buys and sells all the time.  I have a buy and hold philosophy, so since I have the final say, we will probably go that way.  The reason I suggested stocks rather than a mutual fund is because SIL is interested in stocks. 

My question to you good people is should I set up a Roth or taxable account for the children?  I see people mentioning ROTH's for kids and wonder if it would be better to do.  IF anyone can tell me the pros and cons of each I would appreciate it.

                                                                  Miss Prim

mtn

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Re: Just opened up accounts for both of my grandsons.
« Reply #1 on: December 26, 2019, 07:31:36 AM »
Roth. They have no income, so they'll have $0 in taxes. So the money put in it will be tax free, for life, even from capital gains.

And I'd do a mutual fund; if SIL doesn't like it he can go fly a kite. Then in 4 years when its grown and his investments have not, your grandkids can learn something. And this is coming from someone who does not strictly hold to a Mustachian/Boglehead investment strategy.

BECABECA

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Re: Just opened up accounts for both of my grandsons.
« Reply #2 on: December 26, 2019, 07:44:56 AM »
I second the idea of buying mutual funds so your grandkids will eventually be able to see firsthand how much better mutual funds have done than your SIL’s random stock picks.

I don’t think you’ll be eligible to open a Roth for your grandkids yet, you need to have eligible income in order to contribute to a Roth. When the grandkids get their first job in high school, then they should open a Roth.

So since this account will most likely need to be a taxable account, that’s even more reason to buy VTSAX and just hold it for the long run. Dividends by themselves won’t be high enough to cause the kids to have enough taxable income to require to file taxes. If you were instead buying individual stocks, when you sell them you’d have a taxable event.

mtn

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Re: Just opened up accounts for both of my grandsons.
« Reply #3 on: December 26, 2019, 09:26:23 AM »
I second the idea of buying mutual funds so your grandkids will eventually be able to see firsthand how much better mutual funds have done than your SIL’s random stock picks.

I don’t think you’ll be eligible to open a Roth for your grandkids yet, you need to have eligible income in order to contribute to a Roth. When the grandkids get their first job in high school, then they should open a Roth.

So since this account will most likely need to be a taxable account, that’s even more reason to buy VTSAX and just hold it for the long run. Dividends by themselves won’t be high enough to cause the kids to have enough taxable income to require to file taxes. If you were instead buying individual stocks, when you sell them you’d have a taxable event.

The kids babysat for Grandma's and Grandpa's ant farm for the entire year at an agreed upon rate of $3 a day each. There is the eligible income.

GizmoTX

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Re: Just opened up accounts for both of my grandsons.
« Reply #4 on: December 26, 2019, 09:36:28 AM »
Your grandsons are not eligible for any kind of IRA until they have earned income. UGMA & IRA types cannot be the same account. UGMA accounts belong to your grandsons the minute they turn 18, & they may spend it in a way you'd not want. It also could act as a disincentive if large enough; I've seen this happen.

Consider a simple revocable trust to hold your grandsons' investments -- you get to specify additional conditions in the trust, and administer it as trustee. We set up such trusts for our son & nephews. Our trusts specified discretionary payments for education or other support, with a portion payable upon university or trade school graduation; in the event they didn't pursue higher education or had funds remaining, the balance paid out at age 30.

We invested the trusts in indexed funds like VTSAX; they have the advantages of low fees, excellent diversification, tax friendly, & decent returns without much monitoring. Individual stocks are much riskier. The trusts require their own return, but the tax has been minimal or zero due to fund appreciation; when sold, it's a long term capital gain. The beneficiaries are not taxed on the proceeds.

DaMa

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Re: Just opened up accounts for both of my grandsons.
« Reply #5 on: December 29, 2019, 09:50:11 AM »
Miss Prim, I see you are in Michigan.  There is a credit union in Metro Detroit called DFCU Financial that pays a dividend of $50 a year for UGMA accounts.  I put in $50 at Christmas and $50 at birthday for each of my grands.  My parents have been putting in larger amounts.

GizmoTx, I never thought of a large UGMA as a disincentive.  We've been debating putting more the UGMA instead of MESP.  Good reason to stick with MESP.  I've also been trying to get my parents to do MESP, and can use this to help persuade them.

I would also be interested in learning more about how people use the Roth for children without "real" jobs.  (By real i mean paychecks from outside the family.)

EricEng

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Re: Just opened up accounts for both of my grandsons.
« Reply #6 on: December 31, 2019, 10:19:36 AM »
The kids babysat for Grandma's and Grandpa's ant farm for the entire year at an agreed upon rate of $3 a day each. There is the eligible income.
If you want an audit, go for it.  Young children claiming sizeable income without a w2 is huge red flag for audits.  Household chores and tasks for family do not count as income even if paid.  They have to be paid tasks for non family IE neighbors.

You can't do a roth for the children as they have no real income to claim it against.  The problem with opening a UTMA for them is they'll have to start filing separate tax returns for the dividends and gains in the account if it gets too large.  The parents may not want that extra headache.  Open a separate brokerage after-tax account in your name, but dedicate it for the kids.  They'll just have to trust you.