Author Topic: Saving for children  (Read 4461 times)

mac91red

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Saving for children
« on: July 04, 2016, 12:34:01 PM »
Does anyone have any advice for saving for children?  When I was a child my parents and grandparents bought me savings bonds every year on my birthday and Christmas and by the time I left the house it was a nice little chunk of money to help bridge the first few years while I was going to school full time (paid for with student loans) and working part time.  Savings bonds now just don’t look that appealing for an investment in the 10-15 year range.  I am not too keen on a college savings plan as it seems too restrictive.  I want to be able to be able to use the money where it will benefit them the most – if it is to help them pay for some schooling, great, if It is better used to help them on a down payment on a home well then it can be used for that.  My point is that I can’t predict exactly what type of financial help they’ll need as young adults but I feel fairly confident that they will need help in some capacity. 

I thought maybe a Roth would be my best bet?  Between my wife and I we could do a max roth contribution say once every 3rd year.  This give me the freedom to give them funds if/when I see fit?  Or should I stick with our traditional IRA and go with some other after tax contributions for this need?

Thanks

sparkytheop

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Re: Saving for children
« Reply #1 on: July 04, 2016, 01:33:34 PM »
Will you be 59 1/2 before you'll want to use that money?  If not, you'd only be allowed to withdraw your contributions without penalty if you go with a Roth.  While the earnings can stay there and continue to compound interest, will the contributions alone be enough?  (if you're putting in $30k, I would hope that would be enough, but I also expected my son to get a job.  His first day was yesterday.)

mrpercentage

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Re: Saving for children
« Reply #2 on: July 04, 2016, 02:23:12 PM »
Depends on what you want it for. For kids I just do a taxable. In the United States they would need to get more than $10,000 in interest in one year to owe anything. So unless you are talking about a hundred thousand dollars you will do just fine with a taxable and it could be used for anything (down payment, school, car). Im sure somebody will have something to say about that. I would listen and look into things because Im not an accountant. However, I just do a taxable. If my son wants a commercial pilots license, welding training, or trapeze training so he can join the circus-- no problemo.

mac91red

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Re: Saving for children
« Reply #3 on: July 04, 2016, 02:26:30 PM »
Depends on what you want it for. For kids I just do a taxable. In the United States they would need to get more than $10,000 in interest in one year to owe anything. So unless you are talking about a hundred thousand dollars you will do just fine with a taxable and it could be used for anything (down payment, school, car). Im sure somebody will have something to say about that. I would listen and look into things because Im not an accountant. However, I just do a taxable. If my son wants a commercial pilots license, welding training, or trapeze training so he can join the circus-- no problemo.

Sweet that is kinda what I was thinking - college experience isn't for everyone. 



Will you be 59 1/2 before you'll want to use that money?  If not, you'd only be allowed to withdraw your contributions without penalty if you go with a Roth.  While the earnings can stay there and continue to compound interest, will the contributions alone be enough?  (if you're putting in $30k, I would hope that would be enough, but I also expected my son to get a job.  His first day was yesterday.)

Yup i'd use the money before 59.5.  Contributions would be enough.  My thought was this will be a supplement at my discretion.  They'll have to work and "earn their way" so to speak.  I hope to steer them towards a company that will help pay for their college tuition if that is what they choose to do.  Or if they go another direction then we can help them bridge the gap a little until they are making decent income.  Or maybe they'll hit the ground running and they wont need our help.  Congrats to you and your son!

nereo

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Re: Saving for children
« Reply #4 on: July 04, 2016, 02:29:10 PM »
Will you be 59 1/2 before you'll want to use that money?  If not, you'd only be allowed to withdraw your contributions without penalty if you go with a Roth.  While the earnings can stay there and continue to compound interest, will the contributions alone be enough?  (if you're putting in $30k, I would hope that would be enough, but I also expected my son to get a job.  His first day was yesterday.)

The above is incorrect.  See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Just to be clear, are you talking about saving money in your own account to be gifted later? 
If so, why aren't you using your IRA bucket now?
In the US the tax burden is placed o the donor, not the recipient.  The annual exclusion is $14,000.  Click here for more info.

mrpercentage

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Re: Saving for children
« Reply #5 on: July 04, 2016, 04:04:53 PM »
I forgot one important part. Taxable UTMA. Thats what I do. It makes it theirs and therefore the taxes go under them. As a minor they probably won't owe anything until they get more cash than most adults have in their home

Scandium

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Re: Saving for children
« Reply #6 on: July 05, 2016, 09:10:01 AM »
I have a taxable vanguard account (joint with wife) and we save as much there as possible after tax-advantaged. If our son needs money at 16, 18, 25, whatever, and we feel it's worth helping, we will take from our savings pile or our income. I don't see the point of having a "special" account to save for the child, it's all the same money after all. Perhaps unless you want to teach them about saving but then you just set up a bank or brokerage account for them. A taxable account is the most flexible.

catccc

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Re: Saving for children
« Reply #7 on: July 05, 2016, 02:01:14 PM »
Most vocational schools do qualify for 529 use, so someone that wants to be a welder could still use it.  Also, I feel like I can tell at age 7 that my first will be an academic type and will want to go to college.  Not sure how old your kid(s) are, but it might be interesting to see how they see the future at their current age.  Obviously, things can change at any moment, but you may be able to glean some clues on what their needs will be in 10 years...

And... am I a totally mean parent to think that if my kids aren't going to college, they better have a good alternative plan that doesn't involve needing any money from me?! 

Lastly, there is a point in having a special account for a child in that child's name- it's tax advantaged to a small extent.  Although I'm sure it's debatable whether it's worth your while to parse this out for the small advantage.  The power of the benefit depends on the parent's highest tax bracket, and the nature of the unearned income. (Regarding nature of the unearned income: i.e. capital gains and qualified dividends may not be taxed on the parent's return, anyway.  Interest income, on the other hand, may be taxed at the parent's highest rate.)  Basically by putting taxable investments in your child's name, you are shifting income from your return to theirs.  This is limited by kiddie tax rules, I think in 2016 is was $2,100.
« Last Edit: July 05, 2016, 02:27:18 PM by catccc »

RFAAOATB

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Re: Saving for children
« Reply #8 on: July 05, 2016, 02:16:37 PM »
And... am I a totally mean to think that if my kids aren't going to college, they better have a good alternative plan that doesn't involve needing any money from me?! 

Good point.  College isn't for everyone, but not going to college is for OTHER PEOPLE like those too dumb to want it and too poor to afford it.  If you can afford it, t's far more hobbling to even tell your kid that college isn't an option for them.  Getting a BA without crippling debt is what's going to keep your progeny from sliding down the socioeconomic ladder.  Better make sure they got the best chances for that.

catccc

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Re: Saving for children
« Reply #9 on: July 05, 2016, 02:41:21 PM »
And... am I a totally mean to think that if my kids aren't going to college, they better have a good alternative plan that doesn't involve needing any money from me?! 

Good point.  College isn't for everyone, but not going to college is for OTHER PEOPLE like those too dumb to want it and too poor to afford it.  If you can afford it, t's far more hobbling to even tell your kid that college isn't an option for them.  Getting a BA without crippling debt is what's going to keep your progeny from sliding down the socioeconomic ladder.  Better make sure they got the best chances for that.

Maybe I'm being dense, but I can't tell if you are being sarcastic or concurring with my sentiment.  So I'll clarify that I just meant not going to college is acceptable to me as a parent if my kid has found a way to support herself without a degree.

Huge fan of getting a BA without crippling debt!  My parents didn't have anything saved for me, but they had decent income and helped me with room and board in the first year.  Tuition was covered under a scholarship the first year.  When I lost that scholarship (bad grades), I felt really bad and decided it was on me to take care of the rest.  I worked 3 jobs, got some credits in cheap over summers at the community college, and negotiated another scholarship to pay my way w/o a cent of debt.  This was 1997-2002, though, so maybe college costs weren't so out of control back then.  Even on the 5.5 year plan.

But back to 529s and saving for kids, I wanted to share a reply to another 529 topic from seattlecyclone regarding an alternative use for 529s:
http://forum.mrmoneymustache.com/ask-a-mustachian/529-college-savings-plan-vs-custodial-acocunt/

RFAAOATB

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Re: Saving for children
« Reply #10 on: July 05, 2016, 04:28:33 PM »
Maybe I'm being dense, but I can't tell if you are being sarcastic or concurring with my sentiment.  So I'll clarify that I just meant not going to college is acceptable to me as a parent if my kid has found a way to support herself without a degree.

Was concurring.  One thing I noticed with my wife's difference of opinion with me on whether going to college is optional or mandatory for our future children is family experience and resulting expectations.  I went to college, along with both my parents, and am of the opinion that it is mandatory.  My wife dropped out and her parents didn't go.  She's is willing to say out loud that college is optional while I think even allowing that as a possibility is setting them up for failure.  The hard part for me to imagine is parents with degrees saying college is optional.  That does not look like a good bet.

Greenpez

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Re: Saving for children
« Reply #11 on: July 05, 2016, 06:12:16 PM »
Maybe I'm being dense, but I can't tell if you are being sarcastic or concurring with my sentiment.  So I'll clarify that I just meant not going to college is acceptable to me as a parent if my kid has found a way to support herself without a degree.

Was concurring.  One thing I noticed with my wife's difference of opinion with me on whether going to college is optional or mandatory for our future children is family experience and resulting expectations.  I went to college, along with both my parents, and am of the opinion that it is mandatory.  My wife dropped out and her parents didn't go.  She's is willing to say out loud that college is optional while I think even allowing that as a possibility is setting them up for failure.  The hard part for me to imagine is parents with degrees saying college is optional.  That does not look like a good bet.

 Do people still make their kids go to college?? Though I guess it's telling that you equate not going to college with failure...

mrpercentage

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Re: Saving for children
« Reply #12 on: July 05, 2016, 06:26:13 PM »
Most vocational schools do qualify for 529 use, so someone that wants to be a welder could still use it.  Also, I feel like I can tell at age 7 that my first will be an academic type and will want to go to college.  Not sure how old your kid(s) are, but it might be interesting to see how they see the future at their current age.  Obviously, things can change at any moment, but you may be able to glean some clues on what their needs will be in 10 years...

And... am I a totally mean parent to think that if my kids aren't going to college, they better have a good alternative plan that doesn't involve needing any money from me?! 

Lastly, there is a point in having a special account for a child in that child's name- it's tax advantaged to a small extent.  Although I'm sure it's debatable whether it's worth your while to parse this out for the small advantage.  The power of the benefit depends on the parent's highest tax bracket, and the nature of the unearned income. (Regarding nature of the unearned income: i.e. capital gains and qualified dividends may not be taxed on the parent's return, anyway.  Interest income, on the other hand, may be taxed at the parent's highest rate.)  Basically by putting taxable investments in your child's name, you are shifting income from your return to theirs.  This is limited by kiddie tax rules, I think in 2016 is was $2,100.

Well one of the advantages to having an UTMA is the money is unquestionably the child's. That means if a nasty divorce unexpectedly shows up the spouse can't do shit with that money without getting her ass handed to her in court. I don't expect that to happen but it has before. You can bet on it.
It also keeps you from going back on your commitment When they become a teenager. Many a child's money has magically transformed into a boat this way.
Finally opon your demise there is no argument or wonder on who's money it is. It is the child's
« Last Edit: July 05, 2016, 06:28:55 PM by mrpercentage »

catccc

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Re: Saving for children
« Reply #13 on: July 06, 2016, 08:37:43 AM »
Well one of the advantages to having an UTMA is the money is unquestionably the child's. That means if a nasty divorce unexpectedly shows up the spouse can't do shit with that money without getting her ass handed to her in court. I don't expect that to happen but it has before. You can bet on it.
It also keeps you from going back on your commitment When they become a teenager. Many a child's money has magically transformed into a boat this way.
Finally opon your demise there is no argument or wonder on who's money it is. It is the child's

This could also be seen as a disadvantage.  I'm just imagining a freshly minted 18 year old "adult" blowing it on something stupid.

catccc

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Re: Saving for children
« Reply #14 on: July 06, 2016, 08:47:34 AM »

Was concurring.  One thing I noticed with my wife's difference of opinion with me on whether going to college is optional or mandatory for our future children is family experience and resulting expectations.  I went to college, along with both my parents, and am of the opinion that it is mandatory.  My wife dropped out and her parents didn't go.  She's is willing to say out loud that college is optional while I think even allowing that as a possibility is setting them up for failure.  The hard part for me to imagine is parents with degrees saying college is optional.  That does not look like a good bet.

 Do people still make their kids go to college?? Though I guess it's telling that you equate not going to college with failure...

DH and I both hold degrees, and we will not "make" our kids go to college, but we will strongly encourage it unless they have some plan to be self sufficient.  Also, I kind of view a bachelor's as the new HS diploma.  So many people get them now and for many jobs they will be required.  Would most parents "make" their kids go to high school?   Probably.  For some parents, the standard mandatory education is to complete high school.  For others, it is college. 

But I'm going to guess if RFAAOATB's kid ends up being a rock star and is earning a good living touring the world and producing amazing albums, said kid forgoing college for the time being will be condoned.  I don't think RFAAOATB thinks not going to college is failure, he just thinks it reduces the chance of failure, however you define that...  (In relation to this discussion, I would define it as not being able to support yourself if you have the capacity to do so.)

Greenpez

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Re: Saving for children
« Reply #15 on: July 06, 2016, 01:20:52 PM »


DH and I both hold degrees, and we will not "make" our kids go to college, but we will strongly encourage it unless they have some plan to be self sufficient.  Also, I kind of view a bachelor's as the new HS diploma.  So many people get them now and for many jobs they will be required.  Would most parents "make" their kids go to high school?   Probably.  For some parents, the standard mandatory education is to complete high school.  For others, it is college. 


That's kind of a problem, don't you think? How many people do you know that have put themselves into tremendous debt getting a degree they never really use? I know more than a few who have never used their degree for anything. How much of a crisis is student loan debt because people are treating college like high school?

 My wife and I both have degrees and actually work in the field we have degrees in, but neither of us would think twice if our kids did not want to go to college.

catccc

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Re: Saving for children
« Reply #16 on: July 06, 2016, 01:52:26 PM »
I personally think it's a problem that people go into tremendous debt to get degrees, whether they use them or not.

I don't think it is a problem that a college degree is a new standard in minimum education for some. 

"people treating college like high school."  My kid treated first grade as seriously as I treated college, so that statement doesn't necessarily mean anything to some people.  Different strokes for different folks. 

I have no problem with people that don't hold college degrees or don't expect their kids to hold college degrees.  I am not an elitist.  I don't think a college degree holder is any better of a person than someone who is not.  Or that as an accountant earning a nice salary I'm any better than my husband who does not use his degree and is a SAHD and part time barista in a local coffee shop.

I amazingly (or maybe not) personally know zero people that got into tremendous debt getting a degree they don't use.  I do know one person that got into tremendous debt with an advanced degree that she uses.  I know one person that got a degree and doesn't use it, but thankfully he (DH) didn't get into tremendous debt to get it.  Everybody else fared well.  They use their degrees and they are paying off their reasonably sized loans just fine.

I'm going to have to take a wait and see approach and evaluate my kids and their situation when the future is here before I decide I'm not going to think twice if they don't want to go to college.  There was a whole thread elsewhere on this forum about how to get adult children out of the house and independent.  If my kid doesn't want to go to college because they are busy with a start up that could turn into something successful, fine.  If my kid wants to play video games 24/7 and rely on my income at 18, I surely will think twice about them not wanting to go to college.  And there are so many in-between possibilities to consider.

There is no right answer, I'm not saying there is.  Some people make their kids go to bed at a certain time, and others let the child take the lead on when to sleep.  What's right for you and your family might not be right for someone else.  Please don't sound incredulous because someone's parenting choices aren't exactly what yours would be.  In the kind words of Mayim Bialik, "Let's reserve judgement for people for people that beat their children..."

sorry to have derailed this.  Yes, saving money for kids is a nice thing to do.  Carefully weigh the savings vehicle choice against your personal feelings on college, potential uses for restricted funds, etc. Consider the child's personality and perspective if your little one is far along enough in life that you can get any clues about what they want in their future.

seattlecyclone

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Re: Saving for children
« Reply #17 on: July 06, 2016, 02:14:41 PM »
Maybe I'm being dense, but I can't tell if you are being sarcastic or concurring with my sentiment.  So I'll clarify that I just meant not going to college is acceptable to me as a parent if my kid has found a way to support herself without a degree.

Was concurring.  One thing I noticed with my wife's difference of opinion with me on whether going to college is optional or mandatory for our future children is family experience and resulting expectations.  I went to college, along with both my parents, and am of the opinion that it is mandatory.  My wife dropped out and her parents didn't go.  She's is willing to say out loud that college is optional while I think even allowing that as a possibility is setting them up for failure.  The hard part for me to imagine is parents with degrees saying college is optional.  That does not look like a good bet.

 Do people still make their kids go to college?? Though I guess it's telling that you equate not going to college with failure...

I will strongly encourage college for my children if they have a plan going into it of what they want to study and how that will lead to a career. It's fine for them to change their plans once they get there, but college is too expensive to go in with no plan and no major just because your parents expect you to be there.

MustacheAndaHalf

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Re: Saving for children
« Reply #18 on: July 06, 2016, 02:33:25 PM »
Will you be 59 1/2 before you'll want to use that money?  If not, you'd only be allowed to withdraw your contributions without penalty if you go with a Roth.  While the earnings can stay there and continue to compound interest, will the contributions alone be enough?
...
The above is incorrect.  See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
...
(Other poster, interjecting here)
Calling a paragraph incorrect isn't helpful to OP.  I also disagree with you, so here's my take:
* Roth contributions can be withdrawn before age 59.5.
* After withdrawing contributions and conversions (basis), you withdraw earnings.
* Withdrawing earnings from a Roth IRA before age 59.5 incurs a 10% penalty.

If you dig into the thread you cited, the first "more detail" link says the same thing I'm saying:
https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/
"If you withdraw from a Roth IRA prior to age 59˝, the taxation and penalties depend on exactly which dollars you took out."

So I agree with the earlier poster, and disagree with the reply above.  Roth contributions can be withdrawn penalty free, but withdrawing Roth earnings incurs a 10% penalty.

nereo

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Re: Saving for children
« Reply #19 on: July 06, 2016, 02:55:21 PM »
Will you be 59 1/2 before you'll want to use that money?  If not, you'd only be allowed to withdraw your contributions without penalty if you go with a Roth.  While the earnings can stay there and continue to compound interest, will the contributions alone be enough?
...
The above is incorrect.  See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
...
(Other poster, interjecting here)
Calling a paragraph incorrect isn't helpful to OP.  I also disagree with you, so here's my take:
* Roth contributions can be withdrawn before age 59.5.
* After withdrawing contributions and conversions (basis), you withdraw earnings.
* Withdrawing earnings from a Roth IRA before age 59.5 incurs a 10% penalty.

If you dig into the thread you cited, the first "more detail" link says the same thing I'm saying:
https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/
"If you withdraw from a Roth IRA prior to age 59˝, the taxation and penalties depend on exactly which dollars you took out."

So I agree with the earlier poster, and disagree with the reply above.  Roth contributions can be withdrawn penalty free, but withdrawing Roth earnings incurs a 10% penalty.
What you are saying is both techinically accurate and not at all what I was getting at in my response.  The OP asked whether (s)he start putting money into a ROTH instead of their current contributions into a tIRA. An obvious alternative is to do a ROTH conversion later down the road - which could be a very smart thing to do is they plan on being retired or have a lower income when they want to give financiall support.

Whenever possible I try to link to source material so that the OP can decide what will work in his/her situation. That's why I also linked to the tax implications (since that was part of the OP's quesitons) Unfortunately OP hasn't checked back yet to fill in some of the details.  So be it.

AlwaysLearningToSave

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Re: Saving for children
« Reply #20 on: July 06, 2016, 03:34:00 PM »
I am confused about OP's financial position given the comments about using a Roth IRA for college savings. 

OP: are you already FI or close to it?  If so, then I get that saving in a Roth IRA for your child's education/career launch fund could be a good way to go.

If not, then you have no business saving for your child's education in a Roth IRA because YOU should be using the Roth IRA (or traditional IRA) to save for YOUR retirement.  The best gift you can give your children is to get your own financial situation squared away so that you are never a financial burden to them.  They can borrow money or work to get through school... you cannot borrow or work to fund your retirement. 

Open a UTMA account to deposit any gifts your children receive from grandparents, friends, and other family but do not contribute to it yourself until you are FI or close to it.  When its time for your kids to go off to college or the workforce, give them the gifts they received from others and then figure out how much help you can provide from your income.  By then there is a good chance you will be FI or close to it and can direct a big portion of your income toward helping your children get on their feet.  If life deals you a bad hand and you aren't able to help when the time comes, trust that you did your best to raise them to be self-sufficient and take comfort in knowing that you've done your best to not be a financial burden to them. 
« Last Edit: July 06, 2016, 03:36:46 PM by AlwaysLearningToSave »

Greenpez

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Re: Saving for children
« Reply #21 on: July 06, 2016, 03:44:54 PM »

Wall of text.


 Not sure why you think this is about you. You're jumping through a lot of hoops to defend comments someone else made.

catccc

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Re: Saving for children
« Reply #22 on: July 07, 2016, 09:31:42 AM »

DH and I both hold degrees, and we will not "make" our kids go to college, but we will strongly encourage it unless they have some plan to be self sufficient.  Also, I kind of view a bachelor's as the new HS diploma.  So many people get them now and for many jobs they will be required.  Would most parents "make" their kids go to high school?   Probably.  For some parents, the standard mandatory education is to complete high school.  For others, it is college. 

That's kind of a problem, don't you think? How many people do you know that have put themselves into tremendous debt getting a degree they never really use? I know more than a few who have never used their degree for anything. How much of a crisis is student loan debt because people are treating college like high school?

 My wife and I both have degrees and actually work in the field we have degrees in, but neither of us would think twice if our kids did not want to go to college.

 Not sure why you think this is about you. You're jumping through a lot of hoops to defend comments someone else made.

I don't think it's about me.  You asked me questions.  Just answering & sharing my opinion on the topic.  A.k.a. discussion.  I figure that is what happens on forums, typically.

mac91red

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Re: Saving for children
« Reply #23 on: July 07, 2016, 02:21:11 PM »
Appreciate everyone's feedback.  We do max out our tira every year.  I'm pretty familiar with the laddering that we will take advantage of in fire.  Any savings that I want to be able to give to my kids seems best suited to come from any after tax contributions.  That part always escapes me as we aren't to the point where we are making after tax contributions yet.  We should be in a few years though which gives us plenty of time to have a build up in that account that we can use for them if needed.  Thanks!