Custodial Accounts - Investing For Kids

[Flyingstache]

Hello!

I am curious as to everyone's thoughts on opening up custodial investment accounts for your children? I recently read about this & am considering opening a Vanguard custodial account for my children & buying into index funds/ETFs.

I have a 4yr old & 2yr old with a 3rd coming in March. Currently have OH 529s set up for my 2 children but just looking at other options as well. Thought this would be a way to buy a few shares & then let compound interest work its magic & provide a nice start for my children when they get to be adults in a way that doesn't require my wife & I to use a big chunk of our money to do so.

Would love to hear folks thoughts or experiences with this.

Thanks so much & have a great day!

[la Condessa]

My husband and I have custodial savings accounts for each of our kids and our former foster kids at a credit union that earn 3% per year.  The amounts we are saving per kid are much smaller than a lot of folks here, but it seems to be working well so far.   It is especially valuable to have the foster girls’ savings in a custodial account under our names, as their bio parents can not get at those funds even if they regain custody of the girls. 

We also have custodial Roth IRAs at vanguard for our four oldest kids’ long term savings (up to the amounts they have earned as income and can therefore contribute).  The value of oldest’s (13 yo) account has gone down quite a bit since she deposited over $700 of babysitting money in the summer, but I have encouraged her not to keep a close eye on it and not to worry about temporary drops, and she is okay with it. 

We do also have 529 accounts for the four older kids, but we only contribute enough to qualify for our state’s tax credit, and focus most of our savings for them into more flexible vehicles.

[Hadilly]

I did this for my kids. Vanguard requires 3k to do index funds. I do a full match for anything my kids contribute.

I also set up Roths for my kids, there they have ETFs.

I really wanted to normalize investing from an early age.

[cool7hand]

We used Schwab to set up custodial accounts for a few juvenile family members. The customer service was great. The amounts are what we can manage.

[Sandi_k]

I did this for my kids. Vanguard requires 3k to do index funds. I do a full match for anything my kids contribute.

You can buy ETFs with no minimum. At Vanguard, VOO is the ETF equivalent of VTSAX.

[Sandi_k]

Hello!

I am curious as to everyone's thoughts on opening up custodial investment accounts for your children? I recently read about this & am considering opening a Vanguard custodial account for my children & buying into index funds/ETFs.

Keep in mind that custodial accounts count towards financial aid when you complete the  FAFSA form.

If it's in a 529, you can convert it to a Roth later, if it's not all used (up to $35k, per the new tax plan passed in December 2022).

If it's in a Coverdell (max $2k contributions per year), it's not a Custodial account; it's seen as a revocable trust that can be re-allocated to someone else, and thus is not counted in FAFSA accounting. I have one established for each of my nieces and nephew. The plan is to transfer the account to their name their last semester, which means it will never show up on their FAFSA documentation.

[Jon Bon]

OK I need to do this.

My daughter has a custodial account but its an UTMA brokerage account, I assume this is the wrong one? It was the only thing it let me open. Sorry every time I think to call vanguard they are closed. Was there some box I needed to check to make that happen?

And no limits on ETFs? I cant really justify paying her $6000 a year due to her age, but she could earn $500 type thing.

 

[Flyingstache]

Thanks for all the responses!

A few clarifying questions -

When I do a quick search on Vanguard custodial accounts, the options shown are UGMA-UTMA accounts. Do folks have experience with this? Are you able to buy ETFs through these accounts or if this what was described as having a minimum limit of $3k?

Would an account like this be the preference over a custodial Roth IRA? What would be the benefit of one over the other?

Thanks again for all the great insights!

[Jon Bon]

Thanks for all the responses!

A few clarifying questions -

When I do a quick search on Vanguard custodial accounts, the options shown are UGMA-UTMA accounts. Do folks have experience with this? Are you able to buy ETFs through these accounts or if this what was described as having a minimum limit of $3k?

Would an account like this be the preference over a custodial Roth IRA? What would be the benefit of one over the other?

Thanks again for all the great insights!

LOL SAME

I am on the phone with them right now, Ill let you know what the say!

**Edit**

You have to call in. It takes about 10 mins to set up a Roth for a minor. You cannot do it online according to Nolan at vanguard.

If your kid earns money they can contribute to a Roth, and never pay tax on it. The regular investing account is good, but does have tax consequences when you sell.

[scantee]

I did this for my kids. Vanguard requires 3k to do index funds. I do a full match for anything my kids contribute.

You can buy ETFs with no minimum. At Vanguard, VOO is the ETF equivalent of VTSAX.

I believe VTI is the ETF equivalent of VTSAX.

[Sandi_k]

I did this for my kids. Vanguard requires 3k to do index funds. I do a full match for anything my kids contribute.

You can buy ETFs with no minimum. At Vanguard, VOO is the ETF equivalent of VTSAX.

I believe VTI is the ETF equivalent of VTSAX.

Whoops - that is correct. VOO is the S&P 500 ETF.

[Flyingstache]

@Jon Bon with the Vanguard UTMA brokerage account, have you found that useful? Are there minimum requirements for that & do you have the option to buy either ETFs or index funds?

For you, since you have experience with both this account & now the Roth, if you had to pick one account type, which would you choose & why?

Appreciate the great info!

[Hadilly]

@Flyingstache, why not both? If future financial aid is not a consideration, start a custodial account asap. When your kid is older and working, add the Roth. I have one child who earns decent money from dog walking; it all goes in a Roth even though they are 13.

[Flyingstache]

This may be a dumb question but to confirm - can you only open a Roth IRA for a child if they are receiving income?

Thanks again!

[Sandi_k]

This may be a dumb question but to confirm - can you only open a Roth IRA for a child if they are receiving income?

Thanks again!

That's correct. It must be earned income - so not even interest from a savings account or CD would qualify. W-2 or 1099 income.