529 is fully funded, what now

[JoMama]

Once your kid's 529 is fully funded - what to do with additional gift money? Index fund? Keep funding 529 past the point of where we think he'll need it? He's not exactly long-term schooling/doctorate material if I'm allowed to say that about my kid... We need to keep his money separate from ours but want to make sure he has access to it as an adult (pre-retirement). We are currently putting the excess into a managed fund but need to stop this. Holy cow, the fees - and the taxes.

So - kind of a newbie here - any recommendations that I can look into? Index fund for kids?

Thank you in advance

[mxt0133]

When we were planning to have our first child.  First and foremost our retirement (FIRE) was priority, we did not want our children to be supporting us if we could not longer work.  From there I was already allocating how much of our budget would go to immediate needs vs future needs such as college savings, ect.  After much thought my wife and I decided that instead of focusing on saving for some future expense that might or might not happen, we decided to focus on their immediate needs and to expose them to various activities as early as possible.  The thinking is why save up for college if they might not even get accepted, extreme example I know but the idea is spend the resources now to enable them to have their choice on which one to attend and to be in a position to get as much merit/need based scholarships as possible.

So, send them to camps or activities that might be on the expensive side.  Take trips to broaden their horizons.  I'm not advocating buying them 'stuff' or going to Disney.  But get them things that will exercise their imagination and curiosity, books lots of books (after exhausting what your library has to offer of course).  For us specifically that meant, one SAHP, taking lots of trips to museums, national parks, international travel, bunch of sports, music, and academic camps.  I did just start a college fund with discretionary funds but it is not intended to cover the full cost for all of them.

[CNM]

If your child earns income, I'd recommend putting it in an IRA.

[AdrianC]

We have these:

https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma

The money is in Vanguard ETFs.

[sokoloff]

Same as AdrianC here. I targeted having 75% of college covered by 529 money and 75% of college covered by UTMA money. (Not a typo; there's intentionally a surplus there.)

Be aware that transactions in UTMA are covered by the "kiddie tax" if over about $1000/yr, which meant we ended up paying our preparer some extra money to file those returns and the 5-year gift tax returns for a while until the 5-year gift thing ran out and once we realized that if they had only cap gains and dividends (no sale transactions) that we could more cheaply file them with our returns (same money to IRS; less money to our preparer I mean).

Downside of UTMA is that they get the money without further comment by you at a certain state-dependent age. It's theirs and if they want to turn it into a Ferrari and blow, they can. In our case, we have pretty good kids (albeit young still) and I expect there to be some amount of "if you really F up this money, you may not get a whack of the much larger sum when we kick the bucket". It is also not protected from creditors or divorce of your kids, etc. At some point, we are likely to look into customized family trust, but for now, UTMA and 529 was the way we decided to go. Simple to setup.

[JoMama]

Thanks MMers! This is good info. I'll look into the UGMA/UTMA. We're looking for something that's more flexible than the 529 in terms of what it's spent on (maybe additional education expenses, maybe not). We're not necessarily looking for a tax break, other than it not costing him more in taxes or fees than necessary.

Because his current managed account is actively traded, we ended up having to file and pay for him this year when they sold funds and bought others. In addition to the fees. I'm assuming that if I get him into an Index Fund, via a UGMA, we aren't going to pay taxes on the earnings until he decides to withdraw/sell those funds as an adult. If we keep the contributions under the $14K per-person gift limit. And we'll avoid most of those fees from the people doing the managing in the meantime. Does that sound right?

For the record, this money isn't coming from us. We are on course with our own investments/retirement, but I don't have a lot of experience in investing for kids. And I want to hear thoughts from outside the "financial professional" world. Very much appreciated.

[seattlecyclone]

I'm assuming that if I get him into an Index Fund, via a UGMA, we aren't going to pay taxes on the earnings until he decides to withdraw/sell those funds as an adult.

Not quite. For tax purposes you can think of an UTMA account as equivalent to a regular taxable brokerage account that an adult might own. That means even if you don't trade, there will be some dividends that would be taxed. However under the kiddie tax I think the first $2,100 of unearned investment income is tax-free, so if you keep it under six figures there's not much need to worry about taxes in years where you don't sell anything.

[sokoloff]

...If we keep the contributions under the $14K per-person gift limit...

Three things:
1. That limit is about the gift giver's estate tax, not the recipient's income tax.
2. For 2018, it's $15,000.
3. That "per-person" is "per-giver, per-recipient". So, you and your spouse could jointly give $30K to your kid every year.

[JoMama]

Thanks everyone! Good info.

I also appreciate the initial responder's (mtx0133) ideas about using some of this money to expose them to educational experiences. This isn't what I expected to hear but certainly has me thinking. Thank you.