Where to stash kids' savings?

[brant08]

I have a 3 year old with $500 in the bank.  This is all her birthday/gift money for relatives NOT designated for college (that's separate) or the $15 and change in her piggy bank (which I periodically empty and put into her online acct). I have it in a capital one 360 account right now...since she won't have any reason to spend it for at least a few years.

So...can I do better?  CD? Money market?   I'm fine dumping it into an index fund but don't want her to have to pay taxes at my 35% federal tax rate when she withdraws it.  Are there accounts for minors?

Thanks!!

[MDM]

I'm fine dumping it into an index fund but don't want her to have to pay taxes at my 35% federal tax rate when she withdraws it.  Are there accounts for minors?

Yes.  See UGMA or UTMA.  An index fund seems a fine idea.

If she ends up not needing to withdraw the money for college (more specifically, "withdrawing after she is no longer your dependent") - and the tax laws don't change - there is a good chance her income will be low enough to pay 0% tax on the capital gains.

[Psychstache]

I'm fine dumping it into an index fund but don't want her to have to pay taxes at my 35% federal tax rate when she withdraws it.  Are there accounts for minors?

Yes.  See UGMA or UTMA.  An index fund seems a fine idea.

If she ends up not needing to withdraw the money for college (more specifically, "withdrawing after she is no longer your dependent") - and the tax laws don't change - there is a good chance her income will be low enough to pay 0% tax on the capital gains.

Be careful, I'm pretty sure with UTMAs 100% control of the account shifts to the teenager on their 18th birthday.

[MDM]

Be careful, I'm pretty sure with UTMAs 100% control of the account shifts to the teenager on their 18th birthday.

See http://www.differencebetween.net/business/finance-business-2/difference-between-ugma-and-utma/.  Also, specifics can vary from state to state.

And yes, if you put money in these accounts it is the minor's money.  In our case, that was exactly what we wanted and we were very happy to see her pay 0% when she took the capital gains.

[brant08]

 
Be careful, I'm pretty sure with UTMAs 100% control of the account shifts to the teenager on their 18th birthday.

This is fine; it's her money. It would be in her piggy bank on her dresser if she weren't two :-).  We have the "not really yours but for you" money elsewhere.

I'd imagine she'll use this to pay for some fancy camp she desperately wants to go to and we refuse to fund in middle or high school, or for pocket (beer) money in college or whatever.

[doggyfizzle]

Buy some Proctor and Gamble stock fee-free through Computershare using the Roth option.  I've got my 8 week-old into Coca-Cola, Proctor and Gamble, and Johnson & Johnson in his own account for a couple thousand dollars that will basically fund his retirement without too much extra in contributions.

[MDM]

Buy some Proctor and Gamble stock fee-free through Computershare using the Roth option.  I've got my 8 week-old into Coca-Cola, Proctor and Gamble, and Johnson & Johnson in his own account for a couple thousand dollars that will basically fund his retirement without too much extra in contributions.

Just hope those 3 do better than, say, Enron, General Motors, and Kodak did.

[doggyfizzle]

Buy some Proctor and Gamble stock fee-free through Computershare using the Roth option.  I've got my 8 week-old into Coca-Cola, Proctor and Gamble, and Johnson & Johnson in his own account for a couple thousand dollars that will basically fund his retirement without too much extra in contributions.

Just hope those 3 do better than, say, Enron, General Motors, and Kodak did.

All 3 have thrived for more than 100 years and will outlast my lifetime (I'm 32).  Consumer staples are far more reliable than commodity (Enron), cyclical industrial (GM), or technology (Kodak).

[MDM]

Buy some Proctor and Gamble stock fee-free through Computershare using the Roth option.  I've got my 8 week-old into Coca-Cola, Proctor and Gamble, and Johnson & Johnson in his own account for a couple thousand dollars that will basically fund his retirement without too much extra in contributions.

Just hope those 3 do better than, say, Enron, General Motors, and Kodak did.

All 3 have thrived for more than 100 years and will outlast my lifetime (I'm 32).  Consumer staples are far more reliable than commodity (Enron), cyclical industrial (GM), or technology (Kodak).

For your (and your kid's) sake I hope you are correct.  Compared with the overall stock market (VTSMX), JNJ has done particularly well over the past ~24 years, about double the VTSMX return.  PG has done ~50% better, while KO has done ~5% worse.  See http://quotes.morningstar.com/chart/fund/chart.action?t=VTSMX&region=usa&culture=en-US with KO, JNJ, and PG added.

What the next 24+ years will bring...?