Investment advice for family member's very young children

[TheThirstyStag]

Hi all,

After I scolded her for keeping it in ING/capital one 360, a family member of mine has been asking me for advice in regards to what she should do about the savings of her 1 and 3 year olds.  She is very much "hands off" when it comes to these things, so I suggested just putting it in a targeted "retirement" date 2035 fund, preferably through Vanguard.  Sounds like she's on board.

What do you all think would be a good type of plan to go with?  I asked her about her ultimate goals with this money (which will be a culmination of all monetary gifts they receive in their childhood/adolescence) and it's not necessarily for education.  She's against a 529 for many valid reasons, and does not want them to be able to touch this money until they're at least 18 (preferably 21+).  It seems like this would be grounds to go with a regular old non-tax-advantaged plan in her name and gift them money when she deems them ready, but naturally there are tax and financial aid considerations here.

What advice would you offer a family member in this situation?  Thank you in advance!

[MDM]

...advice in regards to what she should do about the savings of her 1 and 3 year olds.
...
She's against a 529 for many valid reasons....

If she doesn't want to fund a 529 for the kids, and assuming the kids have no earned income (e.g., aren't baby models) so IRAs are out, then she has no usual tax-advantaged places for kid-specific funds.

In this case I'd suggest she & her husband maximize their own tax-advantaged opportunities.  Then consider any taxable accounts as somehow split between their own retirement and the kids' college funds.  They can decide on the definition of "somehow" 15-20 years from now.

In 10-15 years (or whenever the kids start earning their own money), establishing custodial Roth IRAs could be attractive.

Unless these kids are getting thousands of dollars I wouldn't worry overmuch about the investment returns on their birthday and Christmas gifts.

[TheThirstyStag]

In 10-15 years (or whenever the kids start earning their own money), establishing custodial Roth IRAs could be attractive.

Unless these kids are getting thousands of dollars I wouldn't worry overmuch about the investment returns on their birthday and Christmas gifts.

They definitely don't have their own income and won't be doing any modeling or acting, so yeah IRAs are not really part of the conversation.

My family member doesn't really have the discipline to maximize their retirement and mentally make part of it "for the kids."  She really wants something through Vanguard that she controls separately from their own retirement accounts and eventually "hands the keys" over when the kids are mature/trustworthy enough. 

They already have a few thousand from what I understand.  Gifts/etc. definitely are a part of it, but my family member will be making contributions herself over the years.  Also, milestones (sweet 16, high school graduation, religious milestones, etc.) will likely entail large monetary donations from family members, so the amount of money being managed here won't be trivial. 

[MDM]

My family member doesn't really have the discipline to maximize their retirement and mentally make part of it "for the kids."  She really wants something through Vanguard that she controls separately from their own retirement accounts and eventually "hands the keys" over when the kids are mature/trustworthy enough. 

They already have a few thousand from what I understand.  Gifts/etc. definitely are a part of it, but my family member will be making contributions herself over the years.  Also, milestones (sweet 16, high school graduation, religious milestones, etc.) will likely entail large monetary donations from family members, so the amount of money being managed here won't be trivial.

For Vanguard, see https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma

And because I literally had this in the paste buffer from another thread: http://www.schwab.com/public/schwab/investing/accounts_products/accounts/college_savings/custodial_account

One caveat with custodial accounts is that the state decides "when the kids are mature/trustworthy enough" - usually 18 or 21.

[TheThirstyStag]

My family member doesn't really have the discipline to maximize their retirement and mentally make part of it "for the kids."  She really wants something through Vanguard that she controls separately from their own retirement accounts and eventually "hands the keys" over when the kids are mature/trustworthy enough. 

They already have a few thousand from what I understand.  Gifts/etc. definitely are a part of it, but my family member will be making contributions herself over the years.  Also, milestones (sweet 16, high school graduation, religious milestones, etc.) will likely entail large monetary donations from family members, so the amount of money being managed here won't be trivial.

For Vanguard, see https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma

And because I literally had this in the paste buffer from another thread: http://www.schwab.com/public/schwab/investing/accounts_products/accounts/college_savings/custodial_account

One caveat with custodial accounts is that the state decides "when the kids are mature/trustworthy enough" - usually 18 or 21.

Thanks so much for the information.

Regarding UGMA/UGTAs, what advantage does this have over a setting up a regular old ETF and just gifting the money when she wants?  It looks like there aren't any tax advantages with a UGMA/UGTA, no?  Plus a custodial account hurts the child much more from a financial aid standpoint than it would if the assets were in the parents' name.

[MDM]

Regarding UGMA/UGTAs, what advantage does this have over a setting up a regular old ETF and just gifting the money when she wants?

Semantic issues here.

I'd consider "setting up a regular old ETF and just gifting the money when she wants" the same as "consider any taxable accounts as somehow split between their own retirement and the kids' college funds."

Not sure if we are agreeing or disagreeing? ;)

[GGNoob]

My family member doesn't really have the discipline to maximize their retirement and mentally make part of it "for the kids."  She really wants something through Vanguard that she controls separately from their own retirement accounts and eventually "hands the keys" over when the kids are mature/trustworthy enough. 

They already have a few thousand from what I understand.  Gifts/etc. definitely are a part of it, but my family member will be making contributions herself over the years.  Also, milestones (sweet 16, high school graduation, religious milestones, etc.) will likely entail large monetary donations from family members, so the amount of money being managed here won't be trivial.

For Vanguard, see https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma

And because I literally had this in the paste buffer from another thread: http://www.schwab.com/public/schwab/investing/accounts_products/accounts/college_savings/custodial_account

One caveat with custodial accounts is that the state decides "when the kids are mature/trustworthy enough" - usually 18 or 21.

Thanks so much for the information.

Regarding UGMA/UGTAs, what advantage does this have over a setting up a regular old ETF and just gifting the money when she wants?  It looks like there aren't any tax advantages with a UGMA/UGTA, no?  Plus a custodial account hurts the child much more from a financial aid standpoint than it would if the assets were in the parents' name.

Yes it hurts financial aid, but the money is taxed at the child's rate and not the parents rate. If it were me, I'd do the UGMA/UTMA account...but only after fully maxing out my own retirement.


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[Wile E. Coyote]

My family member doesn't really have the discipline to maximize their retirement and mentally make part of it "for the kids."  She really wants something through Vanguard that she controls separately from their own retirement accounts and eventually "hands the keys" over when the kids are mature/trustworthy enough. 

They already have a few thousand from what I understand.  Gifts/etc. definitely are a part of it, but my family member will be making contributions herself over the years.  Also, milestones (sweet 16, high school graduation, religious milestones, etc.) will likely entail large monetary donations from family members, so the amount of money being managed here won't be trivial.

For Vanguard, see https://personal.vanguard.com/us/whatweoffer/college/vanguardugmautma

And because I literally had this in the paste buffer from another thread: http://www.schwab.com/public/schwab/investing/accounts_products/accounts/college_savings/custodial_account

One caveat with custodial accounts is that the state decides "when the kids are mature/trustworthy enough" - usually 18 or 21.

Thanks so much for the information.

Regarding UGMA/UGTAs, what advantage does this have over a setting up a regular old ETF and just gifting the money when she wants?  It looks like there aren't any tax advantages with a UGMA/UGTA, no?  Plus a custodial account hurts the child much more from a financial aid standpoint than it would if the assets were in the parents' name.

Yes it hurts financial aid, but the money is taxed at the child's rate and not the parents rate. If it were me, I'd do the UGMA/UTMA account...but only after fully maxing out my own retirement.


Sent from my iPhone using Tapatalk

Make sure you don't forget about the "kiddie tax":

http://www.irs.gov/taxtopics/tc553.html

[TheThirstyStag]

Regarding UGMA/UGTAs, what advantage does this have over a setting up a regular old ETF and just gifting the money when she wants?

Semantic issues here.

I'd consider "setting up a regular old ETF and just gifting the money when she wants" the same as "consider any taxable accounts as somehow split between their own retirement and the kids' college funds."

Not sure if we are agreeing or disagreeing? ;)

Lol I think we're agreeing, but I'm playing devil's advocate.

She would want a separate account in her name, but separate from her retirement.  My post regarding UGMA/UGTA was more along the lines of "what's the point?"  If she does that, the kids legally must receive the money when they come of age.  If she does sets up a Vanguard account in her name and considers that the kids' money, she could gift them it whenever she sees fit.  Aren't the tax implications in the above 2 options the same?   

I guess what I'm asking is what's the point of a UGMA/UGTA, as there doesn't seem to be any tax advantages and you HAVE to give the child the money at a certain age (sounds silly, but my family member is concerned that her kid might be unwise with money when they're 18/21 and use it for drugs, alcohol, etc.). 

Thanks for all of the information. 

[GGNoob]

Regarding UGMA/UGTAs, what advantage does this have over a setting up a regular old ETF and just gifting the money when she wants?

Semantic issues here.

I'd consider "setting up a regular old ETF and just gifting the money when she wants" the same as "consider any taxable accounts as somehow split between their own retirement and the kids' college funds."

Not sure if we are agreeing or disagreeing? ;)

Lol I think we're agreeing, but I'm playing devil's advocate.

She would want a separate account in her name, but separate from her retirement.  My post regarding UGMA/UGTA was more along the lines of "what's the point?"  If she does that, the kids legally must receive the money when they come of age.  If she does sets up a Vanguard account in her name and considers that the kids' money, she could gift them it whenever she sees fit.  Aren't the tax implications in the above 2 options the same?   

I guess what I'm asking is what's the point of a UGMA/UGTA, as there doesn't seem to be any tax advantages and you HAVE to give the child the money at a certain age (sounds silly, but my family member is concerned that her kid might be unwise with money when they're 18/21 and use it for drugs, alcohol, etc.). 

Thanks for all of the information.

They may officially have control over the money but they can always leave it invested. So they should be teaching their children how to properly manage finances and invest so they will hopefully leave it invested for the long term.

[GizmoTX]

Make sure you don't forget about the "kiddie tax":
http://www.irs.gov/taxtopics/tc553.html

The kiddie tax now applies up to age 24 for a full time student.

Instead of a 529, we set up an educational trust for DS. Although taxable, it gets taxed at the trust's rates, which is lower than ours. The trust can be defined to disburse any funds not spent for education on the graduation date or specified age(s).

[TheThirstyStag]

Regarding UGMA/UGTAs, what advantage does this have over a setting up a regular old ETF and just gifting the money when she wants?

Semantic issues here.

I'd consider "setting up a regular old ETF and just gifting the money when she wants" the same as "consider any taxable accounts as somehow split between their own retirement and the kids' college funds."

Not sure if we are agreeing or disagreeing? ;)

Lol I think we're agreeing, but I'm playing devil's advocate.

She would want a separate account in her name, but separate from her retirement.  My post regarding UGMA/UGTA was more along the lines of "what's the point?"  If she does that, the kids legally must receive the money when they come of age.  If she does sets up a Vanguard account in her name and considers that the kids' money, she could gift them it whenever she sees fit.  Aren't the tax implications in the above 2 options the same?   

I guess what I'm asking is what's the point of a UGMA/UGTA, as there doesn't seem to be any tax advantages and you HAVE to give the child the money at a certain age (sounds silly, but my family member is concerned that her kid might be unwise with money when they're 18/21 and use it for drugs, alcohol, etc.). 

Thanks for all of the information.

They may officially have control over the money but they can always leave it invested. So they should be teaching their children how to properly manage finances and invest so they will hopefully leave it invested for the long term.

I think the point is that she wants to make sure that she has the last say, just in case these important life lessons are not understood by her children.  They're good kids, but she's being extra cautious just in case they get in with the wrong crowd in high school or something like that. 

So am I correct in saying there are no tax advantages to the UGMA/UGTA route? 


Also, thanks to all for pointing out the kiddie tax

[MDM]

So am I correct in saying there are no tax advantages to the UGMA/UGTA route? 

There could be an advantage to having assets in a child's name.  Here is one example:
  - Stock purchased in child's name (the child's SS# is on the UGMA/UGTA account)
  - After custodial period ends and child is no longer a dependent - but before child starts to earn "significant" amounts - stock is sold and capital gain incurred.

If the child's income stays below the 15% tax bracket in the year the capital gain is taken, zero tax is paid on that gain.

The same transaction if done within the (presumably higher-earning) parents' account would incur a tax on the capital gain.

[LordSquidworth]

They may officially have control over the money but they can always leave it invested. So they should be teaching their children how to properly manage finances and invest so they will hopefully leave it invested for the long term.

My parents still have custodial accounts for siblings 21 & 22. Comes down to family. My siblings won't take it until they're given it even though they can.

[TheThirstyStag]

Thanks for all of the advice.  It sounds to me like the minor advantages of going the UGMA/UGTA route are outweighed by the freedom my family member would get by opening a taxable vanguard account in her name and gifting the money when she sees fit.  I think I'll suggest that.

[ltt]

Thanks for all of the advice.  It sounds to me like the minor advantages of going the UGMA/UGTA route are outweighed by the freedom my family member would get by opening a taxable vanguard account in her name and gifting the money when she sees fit.  I think I'll suggest that.

Yep, I like this the best.  This is what we have done with our children.  We didn't put it in their name because we didn't want them to have the potential to blow it.  Some of our children are good with money, some are not.  Your friend will discover how her children handle money several years down the road--then she can do something else if the wishes.  We also didn't open any 529s, in case we had children that did not want to attend college.  As it stands now, one of our children does not want to attend.  Every child out there will not want to attend college, so that has to be taken into consideration.  And once money is put in their name, it's becomes theirs at legal age.

[TheThirstyStag]

Looks like my family member is on board with a regular old taxable Vanguard account in her name that she'll gift when she sees fit.

I have a bit of a silly question, since I've only dealt with Vanguard for my Roth IRA.  What is the total tax situation in a taxable Vanguard account?  Let's say she puts all of the money into VTSAX shares.  I assume dividends will be dealt with by reporting the 1099 form at the end of the tax year.  What about capital gains?  Is this something that is taxed each year, or will it be whenever she hands over the money and a sale of all shares takes place? 

Again, apologies for the naive questions.  I haven't quite gotten into investing in index funds in a taxable bucket yet :)

[TheThirstyStag]

Old topic, I know, but I'm bumping it to see if anyone can answer my question from the above post. 

She will be placing everything in a Vanguard target retirement fund 2035 to keep it hands off (again, not what I would do, but I have the discipline to rebalance every year).   No special designation (UGMA/UGTA, 529, etc.).  Just a regular taxable account in her own name.

How exactly do taxes work, regarding my question above?  Basically, I want to give her a comparison to the tax situation she's currently in with the money in an online bank (reporting gained interest annual on her tax return).  In a regular taxable Vanguard account, does she pay tax both annually and at the time of sale?    That is, is this money taxed three times (before investment, during investment, and upon sale)?

[MDM]

She will be placing everything in a Vanguard target retirement fund 2035 to keep it hands off (again, not what I would do, but I have the discipline to rebalance every year).   No special designation (UGMA/UGTA, 529, etc.).  Just a regular taxable account in her own name.

How exactly do taxes work, regarding my question above?  Basically, I want to give her a comparison to the tax situation she's currently in with the money in an online bank (reporting gained interest annual on her tax return).  In a regular taxable Vanguard account, does she pay tax both annually and at the time of sale?    That is, is this money taxed three times (before investment, during investment, and upon sale)?

See https://personal.vanguard.com/us/funds/snapshot?FundId=0305&FundIntExt=INT#tab=4 for 2014 results as a "for example".  Here is part of that page:


It shows dividends of $0.368/share and short term capital gains of $0.005/share.   I assume the dividends would be qualified dividends, thus taxed under the Long Term Capital Gain and Qualifying Dividends rates.  The short term cap gains are taxed at ordinary income rates.  If she were to sell the actual shares of VTTHX she would incur whatever capital gains/losses that come with the difference between her purchase price and sale price and how long she held them.

Thus the short answer to "is this money taxed three times (before investment, during investment, and upon sale)?" is "yes".

[TheThirstyStag]

Thanks, MDM!