529 or Vanguard broker acct. what did you do?

[clutchy]

So, I need to start a fund for kiddo's college and I'm torn between a broker acct or a 529. 

I like the flexibility of the broker account but I'm not a huge fan of kiddie tax on little one's unearned income.



$950 and over in passive income is where you start actually having to pay some tax, which would probably take a few years to get there.

the 529 is tax deferred but penalized heavily if you don't use it for college.


I thought I was leaning towards the normal broker account but as I type this I can't imagine my child not going to college... besides we need an attorney in the family...

[TheDude]

I can't imagine my kid not going to college however, at this point I find my FIRE more important priority. I like to to defer all the income we can. Once we cant max out deferment and pay off the house I might fund a 529 but I think when the kiddos get there we will just bank roll it. I don't find the 4.63% savings worth tying up the money worth it.

[Dianas Report]

clutchy I am currently working on the same thing with my son. I decided to start a Roth IRA for him and then PERHAPS proceed to a 529. We are passing down G.I. fund to him and he is expected to be bright enough to figure his own way of financing through college. You'll be surprised on how clever kids can be if you give them the opportunity to show you. I paid my own way and came out with almost zero loans at the end.

Even if you decide with a brokerage acct., their tax bracket is so low, you need not be concerned when filing their ez form.

Also, my tax acct. said that minors under the age of 18 do not pay medicare/social security  tax or federal tax. Over $2000, then state tax comes knocking at your door...

Any other parents thoughts on this...how you ended up avoiding taxes all together for your minor?

[MountainFlower]

If the account is in your child's name, will it count against them for grants and if necessary, loans?  Only 5.64% of the value of a 529 can count against your financial aid request.  Maybe that isn't a consideration. 

I plan to open 529s this week.  I just wrote a post in the Investor section regarding Roths vs 529s. See my conclusions at the end.

https://forum.mrmoneymustache.com/investor-alley/investing-for-kids%27-college/

 Don't let this make you think I'm some kind of expert of anything!  I'm totally muddling through information and trying to piece it together. 

[clutchy]

clutchy I am currently working on the same thing with my son. I decided to start a Roth IRA for him and then PERHAPS proceed to a 529. We are passing down G.I. fund to him and he is expected to be bright enough to figure his own way of financing through college. You'll be surprised on how clever kids can be if you give them the opportunity to show you. I paid my own way and came out with almost zero loans at the end.

Even if you decide with a brokerage acct., their tax bracket is so low, you need not be concerned when filing their ez form.

Also, my tax acct. said that minors under the age of 18 do not pay medicare/social security  tax or federal tax. Over $2000, then state tax comes knocking at your door...

Any other parents thoughts on this...how you ended up avoiding taxes all together for your minor?

Just an FYI you can't start an IRA for your kids unless they have earned income from a job.  The penalties are unpleasant.  Not important though...


for minors and full time college kids(dependent) through age 23 their unearned income gets reported on your personal return at your top tax rate.  up to $950 not taxed $950 to $1950 at their rate and then above that at your rate.  Atleast I think that's right...

if you wanted to get them a retirement account I'd try a Riccy trust or whatever they're called.


thx for the advice so far everyone.

[lauren_knows]

Our "strategy" revolves around the state tax credit that you get for 529's (it is different for each state, and non-existent in some, look it up).  We contribute enough to a 529 to receive the max state tax credit (I think it's roughly $4000/yr of contributions) and whatever else we want to contribute to the kid's college fund is in a Vanguard taxable account (in our name).

[grantmeaname]

Also, my tax acct. said that minors under the age of 18 do not pay medicare/social security  tax or federal tax. Over $2000, then state tax comes knocking at your door...

I could be reading the IRS regs incorrectly, but I think that's only if your children work at your business -- if your kid works outside the home, they'll still pay the same FICA contributions that everyone else does.

[Dianas Report]

clutchy, First, your child must have earned income, so we have him clean the rental property grounds, maintenance, gardening, yard maintenance around the rental property, etc.  I keep good records.

Now finding an IRA provider for minors was tricky. Most I came across had a minimum age of 18. Vanguard has "star" and some target retirement accounts that have a $1,000 minimum. After tons of researching, we found E*trade IRA for Minors.

The IRA for Minors is an IRA account (Traditional or Roth IRA) that is opened for the benefit of a child under the age of 18 who has earned income.

grantmeaname Yes, for our circumstance, as a sole proprietorship,  our son is not taxed. But my tax acct. (FYI one of the best in Hawaii)  said over $2,000 (not sure of the exact amt.) he will have to pay State taxes.

[clutchy]

good points all.

thanks again.

[grantmeaname]

grantmeaname Yes, for our circumstance, as a sole proprietorship,  our son is not taxed.

Well, can you see how that's dramatically different than "my tax acct. said that minors under the age of 18 do not pay medicare/social security  tax or federal tax"?

[Dianas Report]

grantmeaname, thanks for pointing that out. True, I will be mindful to try to remember to post all details.


Clutchy, one last thing, although we are huge fans of Roth IRA, we are limited to invest for him since he earns it slowly.  So we may open a 529/ESP for our son and after lots of research we decided among these two because the exp. ratio is low and we are seeking a higher yield on return for him:


Vanguard® 529 Portfolios by Name, example:
Vanguard Small-Cap Index Portfolio Performance:   17.83%   14.55%   9.45%   12.31%   11.20% exp. ratio 0.31%

or

The Utah Educational Savings Plan (UESP) offers a variety of investment choices, which lets you choose your own investment strategy.
I Like Vanguard: Small-Cap Index Fund 4.66% 12.80% 12.80% 17.91% 14.63% N/A 18.45%
Estimated Customized Allocation Total Annual Asset-Based Fee   =   0.26%
Annual Maintenance Fee: The Administrative Maintenance fee is an annual fee of $3 per $1,000 of an account balance and is capped at $15. This fee is waived for Utah residents. UESP also waives this fee for non-Utah residents who choose to view their quarterly account statements <strong>online </strong>rather than receive them in the mail.
<a href="http://www.uesp.org/Investment-Info.aspx">http://www.uesp.org/Investment-Info.aspx</a>

Hope that helps!

[Joel]

clutchy I am currently working on the same thing with my son. I decided to start a Roth IRA for him and then PERHAPS proceed to a 529. We are passing down G.I. fund to him and he is expected to be bright enough to figure his own way of financing through college. You'll be surprised on how clever kids can be if you give them the opportunity to show you. I paid my own way and came out with almost zero loans at the end.

Even if you decide with a brokerage acct., their tax bracket is so low, you need not be concerned when filing their ez form.

Also, my tax acct. said that minors under the age of 18 do not pay medicare/social security  tax or federal tax. Over $2000, then state tax comes knocking at your door...

Any other parents thoughts on this...how you ended up avoiding taxes all together for your minor?

Just an FYI you can't start an IRA for your kids unless they have earned income from a job.  The penalties are unpleasant.  Not important though...

for minors and full time college kids(dependent) through age 23 their unearned income gets reported on your personal return at your top tax rate.  up to $950 not taxed $950 to $1950 at their rate and then above that at your rate.  Atleast I think that's right...

I just wanted to highlight this bolded point about Unearned Income. This is true, and limits sheltering your dollars in your child's accounts. Contrary to Diana's Report's post saying "Even if you decide with a brokerage acct., their tax bracket is so low, you need not be concerned when filing their ez form." Their tax bracket is only low for a very small amount of income.