Author Topic: Investing For Your Child / Children  (Read 9747 times)

Todd

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Investing For Your Child / Children
« on: April 22, 2015, 08:09:55 AM »
Hello All,

I'd like to start an account for my child (3 years old) that I would contribute to over the next several (10-15) years.

Please tell me what YOU do for your little one(-s), and your rationale, if you don't mind?

Thank You ~ Todd

gillstone

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Re: Investing For Your Child / Children
« Reply #1 on: April 22, 2015, 08:34:17 AM »
We are using UTMA with an Ally savings account.  I can't say I'm really happy about it though. I am interested in making a switch to something else, but honestly I am absolutely lost as to what.

I'm wary of 529 plans since they can only go to education expenses and are a pain to withdraw from without penalties or miscalculations of student need

The UTMAs have more freedom, but are taxable.  Also an UTMA will nuke my kid's FASFAs when they get older and whatever cash is on hand when they turn 21 is theirs no matter how dumb they are.


JustGettingStarted1980

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Re: Investing For Your Child / Children
« Reply #2 on: April 22, 2015, 08:42:15 AM »
Hi Todd,

My wife and I have two young children, and we began a 529 plan for them both after lots of research into this.

First a question, are you planning on saving for college, or do you just want some sort of long term investment account for the little one?

The 529 plan was our choice because not only did is it deductible for our state's taxes, but it also allowed tax free growth and tax free spending on college expenses.  If there is anything left over, we will simply transfer the proceeds from Kid A's plan to Kid B's plan. If there is any after that, we plan on transferring to a newly made nonexistent grandchild's account and continuing the cycle of education.

Trifele

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Re: Investing For Your Child / Children
« Reply #3 on: April 22, 2015, 09:00:57 AM »
We have a 529 and also a UTMA custodial account at Schwab invested in index funds.  We chose Schwab because our daughter wanted to do it herself with her own money, and Schwab has a minimum $100 to open, unlike Vanguard, which still requires the regular minimums per fund, even with a UTMA.  The fees are good on the Schwab Total Stock Market index fund -- .09%

wild wendella

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Re: Investing For Your Child / Children
« Reply #4 on: April 22, 2015, 09:27:04 AM »
We have a 529 with nysaves.org.  I chose them because they offer low-cost vanguard index fund investments; the CT plan didn't.  Even though I don't live in NY state and can't get a state discount, I determined the money I'll save on investment fees will soon be more than the tax break would be.

We also have a savings account for our son with capitalone360, and we just transfer money over from this savings account to the 529 monthly. 

I'm not thrilled with the limitations on 529s, but the tax free growth is what led us to chose this.

This site is useful for comparing 529 plan fees across states:
http://www.savingforcollege.com/529_fee_study/index.php
« Last Edit: April 22, 2015, 09:36:56 AM by wild wendella »

kunostories

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Re: Investing For Your Child / Children
« Reply #5 on: April 22, 2015, 09:35:49 AM »
Just opened a Coverdell ESA before the tax deadline. Contributed the max for 2014 and 2015 for my little guy (10 mos). Compounding interest here we come. The Coverdell ESA is similar to a ROTH IRA in that it grows tax free. We set it up through TD Ameritrade (Vanguard and Fidelity don't offer ESA accounts). And will invest in some of TD's 100 commission-fee ETF's they offer.

Rationale was we don't know in which state he'll want to go to school. Truth be told we don't live in the States now and don't plan to until he's of school age. So we don't even know where we'll be.

The 529's are state specific and each have their own rules. The ESA can be used for "any qualifying education expenses" including K-12 education. So that's cool.

Apparently any "custodian" can open an account for your kid, so make sure Grandma or whoever hasn't already or doesn't. The max per year is $2,000 which is low enough that you might want to use it alongside a 529. Can only contribute for someone under 18 and the funds have to be used before the kid turns 30. The cool thing is though, that you can transfer the account to any qualifying family member under 18 and keep rolling - including stepbrothers, sisters, the beneficiary's own kids or even first cousins.

Here's the IRS link with more information:
http://www.irs.gov/publications/p970/ch07.html#en_US_2014_publink1000178449

Scandium

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Re: Investing For Your Child / Children
« Reply #6 on: April 22, 2015, 12:16:39 PM »


The 529's are state specific and each have their own rules. The ESA can be used for "any qualifying education expenses"

I don't know anything about them so need to read about Coverdell ESA, but you need to read up on 529s. Which state you use doesn't matter, the kid can go to school in any other state and use the money, at least for the ones I looked into. A few may have limitations. But the NY state 529 is the best anyway and doesn't have any limitations.

You can always transfer the beneficiary for the 529, back to your self even. Then you could spend the 529 money to pay yourself to go to school in Barcelona after you retire if you want.

To Todd: Why does your child need its own account? What are you trying to achieve? Just contribute to your taxable investment account and give your child money if they need it (and it isn't for something stupid). Seems much easier to me. The child having a ton of assets in his/her name is also a big problem for college aid calculations. I would not do it. 529 or Coverdell sounds like the best options, unless you just want to do general savings.

edit: I read up on the Coverdell, and the rules sound identical to the 529, except the beneficiary has to be younger than 18 or 30? So what exactly is the advantage over a 529?
« Last Edit: April 22, 2015, 01:31:37 PM by Scandium »

kunostories

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Re: Investing For Your Child / Children
« Reply #7 on: April 22, 2015, 07:05:20 PM »
Scandium,

You're right - I misunderstood the 529's. Some of them, like the NY 529, do seem better than the Coverdell ESA with fewer restrictions. The two advantages of the Coverdell seems to be the greater flexibility in investments and the fact that you can use it for K-12 education as well as college. Like many Mustachians, though, I'm an indexer anyway and the NY 529 offers a bunch of solid low-cost funds through Vanguard.

So, I have to say thank you to you and the forum. I came here to learn and right after my first comment, success.

Researching the NY Direct and CA ScholarShare 529's for my kid now. Thanks!

Scandium

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Re: Investing For Your Child / Children
« Reply #8 on: April 22, 2015, 08:26:43 PM »
Scandium,

You're right - I misunderstood the 529's. Some of them, like the NY 529, do seem better than the Coverdell ESA with fewer restrictions. The two advantages of the Coverdell seems to be the greater flexibility in investments and the fact that you can use it for K-12 education as well as college. Like many Mustachians, though, I'm an indexer anyway and the NY 529 offers a bunch of solid low-cost funds through Vanguard.

So, I have to say thank you to you and the forum. I came here to learn and right after my first comment, success.

Researching the NY Direct and CA ScholarShare 529's for my kid now. Thanks!
No problem, you're welcome! I'm not in NY either but did some research and started a 529 there shortly after my child was born. All vanguard and low fees!

frugalnacho

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Re: Investing For Your Child / Children
« Reply #9 on: April 22, 2015, 08:43:11 PM »
I don't have children, but I have opened UGMA/UTMA account with schawb for my nieces.  They allow you to open an account for as little as $100, and you can put the money into a total stock market index fund with low ER.  I usually gift them money for bday and xmas which goes into the account.  Other relatives can contribute as well.

I understand the money in the account will count against them when it comes time for college, but I don't want to lock them into a 529 right now.  If they decide they are going to go to college then I will liquidate the account and open up a 529 for them so it won't hurt them financially when they apply to FAFSA.  In the mean time the balances on the ugma/utma are going to be low enough that I don't anticipate them getting dinged for any taxes, so that's not a concern for me right now.

frugalnacho

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Re: Investing For Your Child / Children
« Reply #10 on: April 22, 2015, 08:49:15 PM »


The 529's are state specific and each have their own rules. The ESA can be used for "any qualifying education expenses"

I don't know anything about them so need to read about Coverdell ESA, but you need to read up on 529s. Which state you use doesn't matter, the kid can go to school in any other state and use the money, at least for the ones I looked into. A few may have limitations. But the NY state 529 is the best anyway and doesn't have any limitations.

You can always transfer the beneficiary for the 529, back to your self even. Then you could spend the 529 money to pay yourself to go to school in Barcelona after you retire if you want.

To Todd: Why does your child need its own account? What are you trying to achieve? Just contribute to your taxable investment account and give your child money if they need it (and it isn't for something stupid). Seems much easier to me. The child having a ton of assets in his/her name is also a big problem for college aid calculations. I would not do it. 529 or Coverdell sounds like the best options, unless you just want to do general savings.

edit: I read up on the Coverdell, and the rules sound identical to the 529, except the beneficiary has to be younger than 18 or 30? So what exactly is the advantage over a 529?

It is my understand that you can roll the child's account into a 529 (or just liquidate it and set up a 529) prior to applying for fafsa.  You don't get the tax free growth of a 529 for the duration of the investment that way, but if the balance is low enough they shouldn't incur taxes anyway.  At least that is my plan for my nieces.

mrpercentage

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Re: Investing For Your Child / Children
« Reply #11 on: April 23, 2015, 04:37:55 AM »
UTMA American Funds by Capitol Group.

AMECX
ANEFX

This may or may not be supplemented with strait stock.

I used them first. They made me money.

In total fairness. I do have an NAV account
« Last Edit: April 23, 2015, 04:44:51 AM by mrpercentage »

Scandium

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Re: Investing For Your Child / Children
« Reply #12 on: April 23, 2015, 06:58:54 AM »
I don't have children, but I have opened UGMA/UTMA account with schawb for my nieces.  They allow you to open an account for as little as $100, and you can put the money into a total stock market index fund with low ER.  I usually gift them money for bday and xmas which goes into the account.  Other relatives can contribute as well.

I understand the money in the account will count against them when it comes time for college, but I don't want to lock them into a 529 right now.  If they decide they are going to go to college then I will liquidate the account and open up a 529 for them so it won't hurt them financially when they apply to FAFSA.  In the mean time the balances on the ugma/utma are going to be low enough that I don't anticipate them getting dinged for any taxes, so that's not a concern for me right now.

Yes this is certainly possible. I'm not sure about the rules, but if you "hide" the money in a 529 a few years before, they wouldn't count as much on FAFSA. But like you say you loose out of the tax-free growth of the funds so not much benefit to the 529 at that point. You would have been better off keeping this account in your own name, and then pay the child's tuition every year. That would be even better for FAFSA purposes (529 count higher than parent's assets). I can see the benefit of having something grandparents can contribute to though, without it seeming like you're taking your kids money for yourself.

Or maybe I'm just selfish for not wanting to transfer net worth from me to my child while he's young.

Hm, could your child gift their brokerage account balance to you before they go to college? That would probably be the optimal way

Wolf359

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Re: Investing For Your Child / Children
« Reply #13 on: April 23, 2015, 09:28:56 AM »
I don't have children, but I have opened UGMA/UTMA account with schawb for my nieces.  They allow you to open an account for as little as $100, and you can put the money into a total stock market index fund with low ER.  I usually gift them money for bday and xmas which goes into the account.  Other relatives can contribute as well.

I understand the money in the account will count against them when it comes time for college, but I don't want to lock them into a 529 right now.  If they decide they are going to go to college then I will liquidate the account and open up a 529 for them so it won't hurt them financially when they apply to FAFSA.  In the mean time the balances on the ugma/utma are going to be low enough that I don't anticipate them getting dinged for any taxes, so that's not a concern for me right now.

Yes this is certainly possible. I'm not sure about the rules, but if you "hide" the money in a 529 a few years before, they wouldn't count as much on FAFSA. But like you say you loose out of the tax-free growth of the funds so not much benefit to the 529 at that point. You would have been better off keeping this account in your own name, and then pay the child's tuition every year. That would be even better for FAFSA purposes (529 count higher than parent's assets). I can see the benefit of having something grandparents can contribute to though, without it seeming like you're taking your kids money for yourself.

Or maybe I'm just selfish for not wanting to transfer net worth from me to my child while he's young.

Hm, could your child gift their brokerage account balance to you before they go to college? That would probably be the optimal way

I don't think it's selfish.  I think it's prudent.  I set up a separate account (not an UTMA) which we're using to invest for our children.  When they get old enough, we will gift it to them.

For college savings, we bought a state pre-paid tuition plan.  Our intention is to be FIRE-able but still working when they are in college.  If they don't end up going to a private or out-of-state college, the pre-paid plan converts to a 529 balance, and we pay for them from up to 100% salary (living off of savings).  Any shortfall will be handled with either loans or out of the savings, depending on the situation.

When my first one was born, we had money saved for a car, but no need for the car.  Instead, we bought the pre-paid tuition.  When our second one was born, we had not quite replenished our car savings.  We used what we had and financed the rest.  (I won't borrow for a car, but I was willing to commit to a short payment plan to get rid of the college tuition.)

We're also using the separate account to invest for them long-term.  The problem with an UTMA is that it becomes theirs at 18.  If they earn money and want to put it into an UTMA, they'll feel ownership of it, and that's fine.  But if I'm going to give them some money to kick-start their savings, it will be an amount bigger than what they've previously had to handle.  At 18, they may be irresponsible with it.  Maybe not (it will depend on the person).  But with an UTMA, I HAVE to turn control over to them at 18 (maybe delay it to 21 in my state.) 

Once they are working and handling money responsibly, we'll start gifting to them for their long-term investments. I also want to make sure they're independent people and can stand on their own feet before we transfer it to them. My hope is that with small regular contributions over a long period of time, the amount we end up giving to them is big enough to help (since we're doing this above and beyond our own retirement savings.)  A relatively small nest egg provided to a young adult with 50 years of compounding ahead of them can make them set for life, especially if they get in the habit of contributing to it themselves.  Maybe they can get FIREd themselves much earlier than we do.

Scandium

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Re: Investing For Your Child / Children
« Reply #14 on: April 23, 2015, 11:53:26 AM »

I don't think it's selfish.  I think it's prudent.  I set up a separate account (not an UTMA) which we're using to invest for our children.  When they get old enough, we will gift it to them.

For college savings, we bought a state pre-paid tuition plan.  Our intention is to be FIRE-able but still working when they are in college.  If they don't end up going to a private or out-of-state college, the pre-paid plan converts to a 529 balance, and we pay for them from up to 100% salary (living off of savings).  Any shortfall will be handled with either loans or out of the savings, depending on the situation.


Glad you approve:) I probably think this way because its kinda what my parent's did. They had (have) money and I didn't get whatever I wanted, but  they did help my buy a car when I needed one, and go to college in the states etc. If I'd wanted to buy a motorcycle I think they would have said no (I also think they were ok giving me money because they knew I wasn't going to spend it on a motorcycle in the first place)

A separate account in our name, but destined for our child is a good idea. Might consider that at some point.

It seems like a 529 is counted equally (~5%) as parents other assets so might not be a huge difference vs a taxable account.
http://www.savingforcollege.com/financial_aid_basics/financial_aid_and_your_savings.php

Of course that page reinforce how important it is that your child has no assets of their own. They'd be expected to contribute 20% of if per year to college! Once he earns his first dollar it goes into a roth IRA, any future savings goes in our name. Until he either finish college, or decide not to go.

My FIRE spreadsheet also project we'll be around the magic 25x expenses when our son goes to college, or a little before. I'd really like to be able to quit or go part time then to reduce our income. That would be optimal plan.

frugalnacho

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Re: Investing For Your Child / Children
« Reply #15 on: April 23, 2015, 01:05:02 PM »

I don't think it's selfish.  I think it's prudent.  I set up a separate account (not an UTMA) which we're using to invest for our children.  When they get old enough, we will gift it to them.

For college savings, we bought a state pre-paid tuition plan.  Our intention is to be FIRE-able but still working when they are in college.  If they don't end up going to a private or out-of-state college, the pre-paid plan converts to a 529 balance, and we pay for them from up to 100% salary (living off of savings).  Any shortfall will be handled with either loans or out of the savings, depending on the situation.


Glad you approve:) I probably think this way because its kinda what my parent's did. They had (have) money and I didn't get whatever I wanted, but  they did help my buy a car when I needed one, and go to college in the states etc. If I'd wanted to buy a motorcycle I think they would have said no (I also think they were ok giving me money because they knew I wasn't going to spend it on a motorcycle in the first place)

A separate account in our name, but destined for our child is a good idea. Might consider that at some point.

It seems like a 529 is counted equally (~5%) as parents other assets so might not be a huge difference vs a taxable account.
http://www.savingforcollege.com/financial_aid_basics/financial_aid_and_your_savings.php

Of course that page reinforce how important it is that your child has no assets of their own. They'd be expected to contribute 20% of if per year to college! Once he earns his first dollar it goes into a roth IRA, any future savings goes in our name. Until he either finish college, or decide not to go.

My FIRE spreadsheet also project we'll be around the magic 25x expenses when our son goes to college, or a little before. I'd really like to be able to quit or go part time then to reduce our income. That would be optimal plan.

Correct me if I am wrong, but I was under the impression that a custodial account set up as a ugma or utma is the child's and the child's tax rate applies as follows: up to $1,000 of interest/dividends/capital gains are untaxed, the next $1,000 is taxed at the child's rate (which should be 0% in nearly all cases), and anything above that get's taxed at the parent's marginal rate.

So if you are in the 25% tax bracket and set up an account intended for the child (but legally in your name), the interest/dividends/capital gains will be taxed at your tax rate.  But if you set it up as a ugma/utma then the first $2,000 in gains/dividends is taxed at 0%. (since capital appreciation would remain unrealized I calculate it would probably require a balance of $100k to achieve $2,000 in dividends)

If the parent is low income then the tax consequences probably won't matter (either free for the kid, or most likely free for you anyway if you are below the 25% bracket*).  However if the parent is in a higher tax bracket the ugma/utma account will offer some tax relief, at least to the point that it generates less than $2,000 per year.  If the amount you have invested generates more than $2,000/yr  I would think it's very likely that the parent is in a high tax bracket (how else could you gift a child that much money unless you earned enough to put you in a higher tax bracket?). 

*This only applies to federal tax rates though.  If I keep the assets in my name and they generate dividends I will pay no federal income tax, but I will get dinged for state income taxes, where as in a ugma/utma account the assets are not mine and I won't get dinged for the taxes.

I see some benefits to using a ugma/utma account, and no draw backs besides the fact that you relinquish control of the assets to the minor once they are no longer a minor**.  I am not concerned with the child taking control at age 18.  I will try to teach them to be fiscally responsible, but ultimately it is their money and they can use it however they see fit once they become an adult. 

**And also that the assets will be more heavily weighted into FAFSA consideration than a 529 account or the parents assets.  The child will know ahead of time if they plan to attend university though, so you can roll it into a 529 account in order to get preferential FAFSA treatment.  Since the balances my nieces will have should not trigger any tax consequences in a ugma/utma account anyway I see no advantage to using a 529 account until it is time to apply to FAFSA.

Wolf359

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Re: Investing For Your Child / Children
« Reply #16 on: April 23, 2015, 03:02:52 PM »
Quote
Correct me if I am wrong, but I was under the impression that a custodial account set up as a ugma or utma is the child's and the child's tax rate applies as follows: up to $1,000 of interest/dividends/capital gains are untaxed, the next $1,000 is taxed at the child's rate (which should be 0% in nearly all cases), and anything above that get's taxed at the parent's marginal rate.
No, you got it right.  There are some tax savings to opening an UGMA/UTMA.  The problem is that those savings are pretty minimal.

Index funds are tax efficient enough that it will not generate a very big tax bill.  The cost of paying those taxes is worth the benefit of passing on the legacy intact.

Imagine a 40-year-old person enlists an 18-year-old to make all his/her important financial decisions.  Those decisions will dictate his/her career choices, savings,  education, and income level.  Well, the choices you make at 18 will shape your life at 40.  For this particular decision (and it may vary by each child's maturity level), I'd like the flexibility of having them make their choices at an age older than 18. 

frugalnacho

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Re: Investing For Your Child / Children
« Reply #17 on: April 23, 2015, 04:32:58 PM »
I think you can specify up to age 21 on the account.  I don't anticipate the accounts to get much more than a couple thousand dollars, so i'm certainly not funding their entire education or anything.  I'm just putting bday and xmas money in the account, and hopefully other relatives will see the utility of it instead of buying them more crap they don't need.  I think when they reach 18 and get an account with a couple grand in it, and they can see the balance over time and see how those small contributions were able to grow and compound, they will not only appreciate it much more than they would have appreciated yet another plastic toy  each birthday, but it will click for them the potential of investing over time.  And if they want to blow it all on tacos, or college, or a car that's their decision to make, even if I think it's a mistake.  I'll advise them, but I don't want to make their decisions for them.

mrpercentage

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Re: Investing For Your Child / Children
« Reply #18 on: April 23, 2015, 06:31:27 PM »
I like the security of a UTMA. If I am saving for my kids its for them. God forbid there is ever a nasty divorce do not expect your other half to respect your wishes even if they do now. UTMA makes it theirs (your kids). I will gift strait stock later if I want. They will get a chunk of Disney and something feels right about that. Kids have a long time to gain interest they can make good money just about anywhere. 50 a month for 25 years can be 75,000 but you probably know that.

Sure their is a possibility of a prodigal son. But hopefully not with half of your brains and all of your guidance. Parents have authority (influence) beyond legal bounds. I could tell you more than one true story of one or both parents spending the money meant for their kids on whatever... a bigger house they didn't need, a boat, hey lets move to Hawaii we deserve it, hey I got drunk and spent my rent money on a night at a casino (not me but 100% true), hey this was all my money anyway why should I give it. I wan't to give my kid an advantage. Im also insuring that advantage against me and my spouse. You never know if we will ever think "we need" the money that was never meant for us. I say never. I cast that message of hope in the sea. Im all in. Im fully committed.

I had to come back and add that because I thought it was relevant.
« Last Edit: April 23, 2015, 08:02:45 PM by mrpercentage »

Wolf359

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Re: Investing For Your Child / Children
« Reply #19 on: April 24, 2015, 07:56:54 AM »
To me, the UTMA is an investment account for minors.  We're probably going to open one for each child to help teach them about investing, long-term goals, and to help them feel ownership of the money (especially if they throw gift money or their own savings into it.) With luck, the UTMA balance will mature into something that they'll get full control over at 18 or 21, having watched it grow over time.

The legacy fund is separate from that, though.  The age we're thinking about for that transfer is closer to 25 than 21.  This is very long-term planning, that there is no societal or moral obligation to do (who tries to fully fund their child's retirement?)  Given a very long timeframe for compounding, it's actually very possible, and not very expensive.  So we decided as a couple to try it.  It truly is investing for your children.

Now, if we suddenly decide we need the money, and want to blow it on a wild party, we could do that.  But it's highly unlikely we'll do that after we've spent a few decades carefully putting it away for them.  And if we get divorced or simply changed our minds, it's our right to do so.  However, I'm actually more worried about once we transfer it, if they stick with the plan, or treat it as a windfall.

Our retirement comes before theirs, though.  This is a Hail Mary pass.  We probably won't even see it land.

Wolf359

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Re: Investing For Your Child / Children
« Reply #20 on: April 24, 2015, 08:52:41 AM »
Quote
50 a month for 25 years can be 75,000 but you probably know that.

That's why I'm not using the UTMA for the legacy.  It stops at 18 or 21, not 25 years.

Take your projection and stop your contributions at 25, but let it compound up to year 65.  What final result do you get?

That's the whole plan in a nutshell. 

I used 8% compounding, and come up with lower numbers, but still. 

mrpercentage

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Re: Investing For Your Child / Children
« Reply #21 on: April 24, 2015, 08:44:39 PM »
Quote
50 a month for 25 years can be 75,000 but you probably know that.

That's why I'm not using the UTMA for the legacy.  It stops at 18 or 21, not 25 years.

Take your projection and stop your contributions at 25, but let it compound up to year 65.  What final result do you get?

That's the whole plan in a nutshell. 

I used 8% compounding, and come up with lower numbers, but still.


This topic has me thinking quite a bit. I want to start by saying Im learning as I go. I never really thought about funding their retirement per say. I want them to have a little leverage starting out in this world. The kind of leverage that goes against you if you start with nothing.
This account could be college, or a down payment on a house, or a cheap first used car plus the first two, or a commercial pilots license or any other such non traditional education for career.

Im giving my kid leverage. I will guide him how to use it. Nothing more just yet. I also plan to stop at 18. By that time I will be 100% focused on wrapping up my retirement or starting a fund in a few years for grand children if Im lucky.

the 50 a month could be 75,000 in 25 years was an illustration not my numbers or plan

Mighty-Dollar

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Re: Investing For Your Child / Children
« Reply #22 on: April 25, 2015, 02:43:35 PM »
Hello All,

I'd like to start an account for my child (3 years old) that I would contribute to over the next several (10-15) years.

Please tell me what YOU do for your little one(-s), and your rationale, if you don't mind?

Thank You ~ Todd
Since they won't be accessing this money for 20 years at least, I'd go 90% VOO (S&P 500 stock index) and 10% AGG (the total bond market).

Acg

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Re: Investing For Your Child / Children
« Reply #23 on: April 25, 2015, 03:31:45 PM »
I didn't read this very thoroughly, so I apologize if this has already been addressed but I think there are some fundamental misunderstandings of how a 529 is structured and I just wanted to clear them up.  The term "529" is similar in many ways to "IRA", its not as flexible but it's just the vehicle, there are many different ways to invest in the 529.  Each state in the US has a preferred 529 partner that they have chosen - and some have tax benefits within each state.  For example, right now NY state's preferred 529 partner is Vanguard.  As a result, if you're a NY state resident, you're able to deduct the contributions that you make to a Vanguard 529 for someone living in NY.  And just to clarify, there are no restrictions on where those funds can be used as long as it's for education.  They just need to be used on education, it doesn't matter if it's in NY or CA.

And for the record, I don't even have a 529 account.  I just work in the industry and have some knowledge of the topic...

Isriam

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Re: Investing For Your Child / Children
« Reply #24 on: April 27, 2015, 08:18:39 AM »
I was just googling this topic.

I have to set up 2 investment accounts for my kids.  UMTA/UMGA/529 seem like options however I have two concerns.

1) I don't know that my kid will go to college, should i bother with 529 or wait and transfer to it when they are 15 or so?
2) If i want to hold the account past 21, is it best to just do a personal taxable investment account and gift it later if I don't transfer it to a 529?

Sounds like UTMA/UGMA has no benefits over a standard taxable account/longevity/college in my case.

begood

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Re: Investing For Your Child / Children
« Reply #25 on: April 28, 2015, 09:05:05 AM »
My hope is that with small regular contributions over a long period of time, the amount we end up giving to them is big enough to help (since we're doing this above and beyond our own retirement savings.)  A relatively small nest egg provided to a young adult with 50 years of compounding ahead of them can make them set for life, especially if they get in the habit of contributing to it themselves.  Maybe they can get FIREd themselves much earlier than we do.

We want to do this too - it is amazing what a difference it makes to save "early and often". My parents did it for us, and we want to do it for our daughter. We'll have to figure out the gifting thing - stay within annual limits, but I'd love for her to have the same kind of strong foundation we did when we started out: no student-loan debt, beater but paid-for cars, and a nest egg with decades to grow.

Wolf359

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Re: Investing For Your Child / Children
« Reply #26 on: April 28, 2015, 10:21:58 AM »
I was just googling this topic.

I have to set up 2 investment accounts for my kids.  UMTA/UMGA/529 seem like options however I have two concerns.

1) I don't know that my kid will go to college, should i bother with 529 or wait and transfer to it when they are 15 or so?
2) If i want to hold the account past 21, is it best to just do a personal taxable investment account and gift it later if I don't transfer it to a 529?

Sounds like UTMA/UGMA has no benefits over a standard taxable account/longevity/college in my case.
The biggest benefit of the 529 is that it accumulates tax-free.  The biggest disadvantage is that it has to be used for education.  If your first child doesn't use it, you can switch it to another kid, use it for your own education, or even wait and assign it to a grandchild.  If you wait until they're 15, you lose the tax benefits.

The UTMA/UGMA is an account for the named child.  Money placed in it belongs to the child.  You can't transfer it to someone else.  It's a normal taxable account, other than it's for a child.  There are some minor tax benefits, but if the account gets big it still gets taxed at your rate.  The biggest disadvantage is that at 18 or 21, the child assumes full control.  I like it to teach them about investing, and let them invest with their own money, but I don't want to dump legacy money there unless they're ready for it.  It's biggest benefit is that it has the child's name on it.  They get a warm glowy feeling when they read that account statement with their name on it (and they pay attention when you teach them how to take care of it.)

Using your own account and designating funds gives you the most flexibility. The gift exclusion for 2015 is $14,000 per person.  That means both my spouse and I can gift $14,000 each to the child without incurring gift taxes.  If the account gets to $75K (as used in one of the examples earlier), we would have to gift $28K at a time over multiple years.  This has the side benefit of seeing how they handle the first influx of funds before they get the second.

A 529 account for us doesn't make as much sense because we used a pre-paid plan already.  If I had to do it over again, I might have done some 529 savings on the side, to allow for an out-of-state school, graduate school or school-related expenses. Mostly, though, I like the flexibility of saving in a taxable account.  If it's not needed, we can use the funds for another purpose. 

Pigeon

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Re: Investing For Your Child / Children
« Reply #27 on: April 28, 2015, 10:45:14 AM »
We have 529s for our kids.  We do intend to pay for college, and higher education of one sort or another is a family expectation.  We live in a state where the contributions are tax deductible.  In the very highly unlikely event that the kids won't use all of what we are saving, we have about  10,000 nieces and nephews, so the money will not go to waste.

frugalnacho

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Re: Investing For Your Child / Children
« Reply #28 on: April 28, 2015, 10:52:51 AM »
The UTMA/UGMA is an account for the named child.  Money placed in it belongs to the child.  You can't transfer it to someone else.  It's a normal taxable account, other than it's for a child.  There are some minor tax benefits, but if the account gets big it still gets taxed at your rate. The biggest disadvantage is that at 18 or 21, the child assumes full control.  I like it to teach them about investing, and let them invest with their own money, but I don't want to dump legacy money there unless they're ready for it.  It's biggest benefit is that it has the child's name on it.  They get a warm glowy feeling when they read that account statement with their name on it (and they pay attention when you teach them how to take care of it.)

Using your own account and designating funds gives you the most flexibility. The gift exclusion for 2015 is $14,000 per person.  That means both my spouse and I can gift $14,000 each to the child without incurring gift taxes.  If the account gets to $75K (as used in one of the examples earlier), we would have to gift $28K at a time over multiple years.  This has the side benefit of seeing how they handle the first influx of funds before they get the second.

A 529 account for us doesn't make as much sense because we used a pre-paid plan already.  If I had to do it over again, I might have done some 529 savings on the side, to allow for an out-of-state school, graduate school or school-related expenses. Mostly, though, I like the flexibility of saving in a taxable account.  If it's not needed, we can use the funds for another purpose.

I think you are understating the "minor" tax benefits.  If you are in the 25% tax bracket, then the difference between placing the funds in your own personal taxable account and sheltering them in a ugma is much larger than you stated.   The first $1,000 of earnings in the ugma account will be tax free, the next $1,000 of earnings will be taxed at the child's rate (probably 0%).  Any earnings above that will be taxed at the parents rate.  It takes a large account balance to exceed $2,000 in realized earnings though (like $100k+ large).  Federal taxes on capital gains and dividends are usually very favorable, but state taxes usually are not, so even if the parent is low enough income that they themselves pay no federal taxes on dividends or capital gains they probably are going to get dinged by state taxes on those earnings.  I think sheltering the money in a ugma will undoubtedly reduce your/your child's tax burden.  The question is whether those tax savings are worth the drawbacks of the ugma (namely that it is the child's account and will be relinquished to them by a certain age and you can't stop it).   

EDIT for clarity:  It works the same as a marginal tax bracket.  If the account gets too big so it's earnings exceed $2,000/yr, then only that excess amount gets taxed at the parents rate.  The first $2,000 will still be taxed at 0%.  So having the account be "too big" isn't even a problem because youyour child still get $2k/yr tax free growth.

You don't incur taxes on gifts above the $14k/yr/person limit.  Everyone gets $14k/yr/person, and it doesn't count against you.  Above that it and it cuts into your life time gift exclusion of $5.34M.  For example you could gift $14k to several people each year, year after year, and never dip into your life time exclusion of $5.34M.  If you gifted $15k to one person in one year though you would get the $14k/yr/person exclusion, and then $1k would count against your life time limit of $5.34M, leaving you with a $5.339M life time exclusion.  This means for the vast majority of people the "gift tax" is a total non issue.  I will FIRE long before I ever get a net worth even remotely close to this limit, so I could be exceedingly generous my entire life, and still leave a huge estate to pass on, and still never owe a "gift tax".  Unless you plan on gifting an enormous amount of money in your life time, you are probably safe to just gift as much as you want without worrying about a gift tax.
« Last Edit: April 28, 2015, 10:55:51 AM by frugalnacho »

Wolf359

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Re: Investing For Your Child / Children
« Reply #29 on: April 29, 2015, 10:16:09 AM »

I think you are understating the "minor" tax benefits.  If you are in the 25% tax bracket, then the difference between placing the funds in your own personal taxable account and sheltering them in a ugma is much larger than you stated.   The first $1,000 of earnings in the ugma account will be tax free, the next $1,000 of earnings will be taxed at the child's rate (probably 0%).  Any earnings above that will be taxed at the parents rate.  It takes a large account balance to exceed $2,000 in realized earnings though (like $100k+ large).  Federal taxes on capital gains and dividends are usually very favorable, but state taxes usually are not, so even if the parent is low enough income that they themselves pay no federal taxes on dividends or capital gains they probably are going to get dinged by state taxes on those earnings.  I think sheltering the money in a ugma will undoubtedly reduce your/your child's tax burden.  The question is whether those tax savings are worth the drawbacks of the ugma (namely that it is the child's account and will be relinquished to them by a certain age and you can't stop it).   
The reason I was thinking the tax benefits are minor is that the dollar amounts involved are fairly low for most of the life of the fund (while the child is a minor), and capital gains are taxed at 15% at most (the tax costs are very low).  Given that I'm investing in tax efficient index funds (no bond funds at this stage), I wasn't expecting the account to generate much in the way of capital gains.  I also was thinking that if the balances got high enough for taxes to be a burden, I could always change my mind and switch to an UTMA at that point (but once I put it in, I can't reverse it.)

I have yet to gift anyone tens of thousands of dollars, so I have to confess my interpretation of gift taxes may be flawed.  It's good to know it's probably not an issue.
« Last Edit: April 29, 2015, 10:19:21 AM by Wolf359 »

planner10

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Re: Investing For Your Child / Children
« Reply #30 on: April 29, 2015, 11:29:40 PM »
I didn't read this very thoroughly, so I apologize if this has already been addressed but I think there are some fundamental misunderstandings of how a 529 is structured and I just wanted to clear them up.  The term "529" is similar in many ways to "IRA", its not as flexible but it's just the vehicle, there are many different ways to invest in the 529.  Each state in the US has a preferred 529 partner that they have chosen - and some have tax benefits within each state.  For example, right now NY state's preferred 529 partner is Vanguard.  As a result, if you're a NY state resident, you're able to deduct the contributions that you make to a Vanguard 529 for someone living in NY.  And just to clarify, there are no restrictions on where those funds can be used as long as it's for education.  They just need to be used on education, it doesn't matter if it's in NY or CA.

And for the record, I don't even have a 529 account.  I just work in the industry and have some knowledge of the topic...

Correct!  One other misnomer I read earlier in this thread is that the 529 can be used only for education.  That is true, but it is also able to be used for room and board, up to the amounts listed by the university as "Room and Board".  You can pay your kids rent and food and books, not just tuition.  So I am not too worried about overcontributing.

As for the FAFSA calculation, it is very easy to transfer beneficiaries.  So perhaps you could move only what you plan on using per year over to one child rather than the full amount?  I haven't really thought this one through so don't consider that a well-thought out idea.  And it would only work if you had multiple kids.

sleepyguy

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Re: Investing For Your Child / Children
« Reply #31 on: April 30, 2015, 06:49:07 AM »
I think quality time is the BEST investment for your children but that's another matter.

We maximize RESP grants (Canada) for both our kids.  If they market plays nice throughout the years, that should cover most of their tuition cost in Canada.  If they decide to do a masters or whatever... they can do that on their own.