Where to put children's money...

[Duke03]

My son has $2,600 in his savings account..(he's 4 by the way)  I was trying to decide what is the best place to park this money and pay the least amount in taxes....  In the future we will add to this with birthday and xmas money ect.  I currently max out my 401k plus 2 different pension plans at my job.  This year I wasn't able to max out my IRA, but will do so starting in 2018.  I'm against opening up any type of 529 or UTMA/UGMA or an account that will effect his taxes, my taxes, or effect his FASFA.  If and when he decides to attend college we will just cash flow it.  I was half way thinking about taking this money and topping off my IRA with it as this seems like the only approach to not having to pay taxes on this money in the future or any gains from it. I'd buy into a fund I don't currently own and ear mark that money as his. When the time comes to give it to him I'd write him a check for what ever the balance of that fund is.  My wife is on board with this plan although I will admit she leaves the money issues up to me.  I'm just wondering what others would do.  My long term plan would be able to hand him a check on his 18th or 21st birthday for 15k to 20k assuming it will go to good use and tell him here is all the birthday and Christmas presents he never missed growing up.

[Sibley]

Only objection I have is handing a 18-20 year old a check for thousands of dollars with no strings. That money has a high chance of being gone in short order. (And make sure that you'll have the cash at the time of course.)

[Fireball]

Custodial Roth IRA?

[sisto]

If he doesn't need the money and you don't intend to setup an account for him to watch it grow, I'd definitely put it your IRA for now.

[Zette]

If you anticipate additional money and this amount growing, be aware that by the time your child is 18 the total amount may be well over the annual tax-free gift limit (currently $12,000), which could complicate giving it back to him -- either you'd have to spread it out over several years, or he would have to pay income taxes on the "gift" of his money back from you.

If you leave it in his own kiddie savings account, there are no taxes owed on the first $1000 of income:  https://www.bankrate.com/finance/money-guides/irs-rules-for-child-s-investment-income.aspx

[inline five]

If you anticipate additional money and this amount growing, be aware that by the time your child is 18 the total amount may be well over the annual tax-free gift limit (currently $12,000), which could complicate giving it back to him -- either you'd have to spread it out over several years, or he would have to pay income taxes on the "gift" of his money back from you.

If you leave it in his own kiddie savings account, there are no taxes owed on the first $1000 of income:  https://www.bankrate.com/finance/money-guides/irs-rules-for-child-s-investment-income.aspx

There is no annual limit. Just a lifetime one and it was just doubled to $11m. There won't be any issues.

[Acorns]

I don't personally feel that it is very ethical to lump my kids' money (from gifts or whatever) in with any of my accounts. I have separate savings accounts for each of them where I deposit their gift monies and when those hit a certain balance (not sure yet, maybe $1000 or so) I will start a Vanguard brokerage account in their name for each of them (we do have a separate 529 to which we contribute a set amount each month). Then, when they start to show a real interest in managing their money, maybe in their early teen years, I will start letting them pick their own investments, or withdraw the money and spend it. They need to be given leeway to learn and make mistakes. I will encourage them to save their money and spend it on a wise purchase, not clothes, cell phones, and other consumer products that quickly lose value.

[stashing_it]

In my opinion the clear winning play involves

-  Putting the money in a vanguard account
-  investing it in VTI when it is small, diversifying to VTI + international when it is a little larger,  and likely into admiral funds if it becomes large enough

The biggest mistake would be keeping the money in a savings account for 15-18 years.    That will likely cost you a lot more than any tax implications or financial aid implications

As long as you doing those things  (or something similar with a different brokerage) then there may also be something clever you can do with different accounts to minimize taxes or improve financial aid.

Personally, my kid has a UTMA account (which I know the OP doesn't want) and I transfer my most appreciated stock into that account, and let that account realize up to 2K in capital gains tax free.    When the kid is 18 it will likely be used to pay for college, or perhaps later in life to bankroll a business

[FindingFI]

If you anticipate additional money and this amount growing, be aware that by the time your child is 18 the total amount may be well over the annual tax-free gift limit (currently $12,000), which could complicate giving it back to him -- either you'd have to spread it out over several years, or he would have to pay income taxes on the "gift" of his money back from you.

If you leave it in his own kiddie savings account, there are no taxes owed on the first $1000 of income:  https://www.bankrate.com/finance/money-guides/irs-rules-for-child-s-investment-income.aspx

There is no annual limit. Just a lifetime one and it was just doubled to $11m. There won't be any issues.

The new tax plan did double the limit for the estate tax to $11m which applies upon death, but I haven't read enough of it yet to know if it changed the gift tax exclusions Zette is talking about.  Those two taxes are not the same.

[ritz]

If you anticipate additional money and this amount growing, be aware that by the time your child is 18 the total amount may be well over the annual tax-free gift limit (currently $12,000), which could complicate giving it back to him -- either you'd have to spread it out over several years, or he would have to pay income taxes on the "gift" of his money back from you.

If you leave it in his own kiddie savings account, there are no taxes owed on the first $1000 of income:  https://www.bankrate.com/finance/money-guides/irs-rules-for-child-s-investment-income.aspx

There is no annual limit. Just a lifetime one and it was just doubled to $11m. There won't be any issues.

The new tax plan did double the limit for the estate tax to $11m which applies upon death, but I haven't read enough of it yet to know if it changed the gift tax exclusions Zette is talking about.  Those two taxes are not the same.

The new tax plan doubled both the estate tax and gift tax exclusion amounts, but only until 12/31/25. Then it will go back to the $5 million per person, indexed for inflation. For 2018, it is about $11.2 million per person.

The current amount you can exclude before you need to file a gift tax return is $14,000 and increases to $15,000 in 2018. If you have two parents, that means that you can gift your child $30,000/year starting next year without filing a gift tax return. If you pay the money directly to a financial institution (ie, you pay for the child's college by paying the money directly to the college), it is not included in that amount. Even if you give your child more than the $30,000/year, you will just start chipping away at your lifetime exclusion, but you will need to file a gift tax return. And then if you did manage to blow through all of that, you would be responsible for the tax on additional gifts, not your kid.

You don't need to worry about the kiddie tax until his earnings reach $2,100/year (2018 amount).