A different investment thread

We have a ton of threads about retirement and all that crap, what about on the other end of the spectrum? Investing for children.

I don't mean building a big nest egg for them, I mean what to do with kids money until they're old enough to use it. 

Take my kid for instance. She's 4.5, there's like $2500 in her savings account. The savings account earns E36 M3, like .5% if that. Transfer to an online savings account for 2% seems easy enough to add to over time and still keeps it accessible. the rates I see on CDs are around the same and not nearly as accessible. 

What else is out there, that a parent or grandparent could add into, but will actually grow with time?

Depends on what you want to use it for.  If you want it specifically for education, the 529 plans have tax advantages on their earnings, and the money has to be used for education or education-adjacent purposes*.  Last time I looked, some states would have a tax advantage not just for the earnings but for the deposit as well, but my memory is a bit fuzzy on that portion.

The tax implications are worse, but I have a custodial account with etrade for each of my kids.  I've used those to purchase some mutual funds that I intend to hold for a fairly long time and they've been growing pretty well.  I wanted the flexibility for them to be able to use the money for whatever made more sense for them so when it comes time to sell off any shares of those funds, there will be more of a tax bill due, however, if they wait until they're 19, it will be taxed at their rate, not mine.  Other downside is that once they're 18, that money is theirs and I have no say in what they do with it.

In addition to the UGMA brokerage accounts that we have, they've also got savings accounts at the same bank that we use.  Each week, we have an automatic transfer of a couple bucks into their savings accounts and any gift checks that they get are deposited into those accounts.  Once they've got a few hundred bucks in there, I transfer that over to the brokerage account and buy up some more mutual funds on their behalf.

* If the child gets a scholarship, they can withdraw up to the amount of their scholarship without any tax or penalty, if I recall that correctly.

College is paid for already. Grandfathered into a decent local liberal arts school and a major major science/tech school tuition free thanks to being born before the professor grandparents retired, plus another college fund if they don't want to go to those schools. 

This is more "you're 15 lets go car shopping" or "happy 18th birthday, here's all your childhood birthday money all grown up" kind of thing. 

I had a not fun time with my UGMA and the tax bills that came with it as I was 25 when I pulled the money out for not educational reasons and I'd rather avoid that, although I do see mutual funds as a more conservative investment option. 

If you're looking at locking the money up for 10+ years, you probably can get a better return by investing it. Regular traditional investment account should suffice in that case and doesn't penalise you like the "wrong" kind of distribution from a 529 plan does.

I passed 50% of my GI bill on to each one of my kids with my fingers crossed they'll get a scholarship or save up for the other half of their education if that's the route they chose. I'm still putting money away each paycheck for them but with the way tuition has increased each year it'll never be enough to cover education costs. 

I also have a CD account for each one of them. CD rates are pretty good right now and one of them is like a 3.5% APY and a 3.44% dividend. I'd rather not put the money I'm putting away for them into riskier investments just for the fact I'd rather them have something than nothing. Anything near 3% is a decent rate of return for a CD in my opinion as well as they were pretty low for a long time. It sucks they aren't accessible without penalty but it keeps you from dipping your hand into their cookie jar for frivolous things IMO. 

I'd open up a taxable brokerage account in your childs name, stick the money in VTSAX (or as close as you can to that fund), reinvest dividends, and not touch it other than to contribute to it. If that is too risky for you, find the best CD's you can.

As soon as you can show her to have any income, put as much of the income as you can to a Roth IRA. 

I would avoid a 529 plan in your situation. Actually, in most situations I would avoid it (I've slowly been coming around to that realization over the past 2-3 years, and recently became firmly entrenched in it)

my daughter is 10... I guess I should start saving for her college.. but hey she can do what I did and just get loans as needed.

When DD#1 was a junior in college DW and I went to a financial aid seminar.  The presenter said, "How many of you have 529 plans?"  About half the crowd raised their hands and looked smug, while the rest of us looked sheepish.

"Guess what?  Every dollar you have in your 529 is a dollar of financial aid your kid won't be getting," he continued.  Lots of the smug looks faded.  I don't know the actual statistics on 529s vs other investments and future FA, but locking that money up for a specific purpose that may not ever come to fruition doesn't seem to make a lot of sense.

My kids both have investment growth accounts with Franklin Templeton that my mother started for them at birth.  She started them with $500 or so each and they have grown to be in the $4k-$5k range in the last 20 years.  Not great, but not bad.  I'm sure that you can shop around and find better vehicles.  Once the DDs reached age 21 we removed our guardianship from the accounts to give them access.

RevRico said:

College is paid for already. Grandfathered into a decent local liberal arts school and a major major science/tech school tuition free thanks to being born before the professor grandparents retired, plus another college fund if they don't want to go to those schools. 

This is more "you're 15 lets go car shopping" or "happy 18th birthday, here's all your childhood birthday money all grown up" kind of thing. 

I had a not fun time with my UGMA and the tax bills that came with it as I was 25 when I pulled the money out for not educational reasons and I'd rather avoid that, although I do see mutual funds as a more conservative investment option. 

I think the only way to have that kind of money saved up is going to involve a tax bill.  You can lock the money up for specific reasons by doing a 529 or opening an IRA (can a minor have an IRA?  I don't know..  never looked in to that) to not have taxes, you can stuff the matress full of cash and not have taxes (and I would include savings acounts as stuffing a matress full of cash because evn 2% isn't worth it for the amounts of money we're talking about here), or you can put it somewhere that it will remain liquid, make money, and incur tax liability.

Death and taxes, my friend.

mtn said:

I'd open up a taxable brokerage account in your childs name, stick the money in VTSAX (or as close as you can to that fund), reinvest dividends, and not touch it other than to contribute to it. If that is too risky for you, find the best CD's you can.

As soon as you can show her to have any income, put as much of the income as you can to a Roth IRA. 

 

I would avoid a 529 plan in your situation. Actually, in most situations I would avoid it (I've slowly been coming around to that realization over the past 2-3 years, and recently became firmly entrenched in it)

X 2 to all of this.

The Roth is nice and flexible, but money going in has to be "earned income" like you'd have on a W-2 or 1099 or you risk angering the tax man. So if your daughter gets a child modeling gig or something, those funds could go into a Roth, but it's probably safest to just do a normal brokerage account and deal with the taxes until she can prove "earned income".

I'd also strongly encourage not draining the account when she's 16, or 18 or something. If she has $5k at age 15, gets a job, and contributes $1k/yr until age 18, that's $9500 when she graduates High school. If she never adds another dime, and sees average 8% returns, that money does this:

If she adds just $1k/yr the line looks the same, but the numbers start to get pretty big:

If you give her $5k to spend on a car at age 16, you'll be her hero for a few months. If you keep that money invested, you could be her hero for life, basically providing a massive safety net and allowing her to pretty much never stress over long term financial security.

Duke said:

"Guess what?  Every dollar you have in your 529 is a dollar of financial aid your kid won't be getting," he continued.  Lots of the smug looks faded.  I don't know the actual statistics on 529s vs other investments and future FA, but locking that money up for a specific purpose that may not ever come to fruition doesn't seem to make a lot of sense.

As I understand it, that is also true of the kid having an investment account.  They'll look at every asset and if the applicant has a 529 or a custodial account, or if they're reached age of majority just a bank account/brokerage account those will all count against them.

wae said:

Duke said:

"Guess what?  Every dollar you have in your 529 is a dollar of financial aid your kid won't be getting," he continued.  Lots of the smug looks faded.  I don't know the actual statistics on 529s vs other investments and future FA, but locking that money up for a specific purpose that may not ever come to fruition doesn't seem to make a lot of sense.

As I understand it, that is also true of the kid having an investment account.  They'll look at every asset and if the applicant has a 529 or a custodial account, or if they're reached age of majority just a bank account/brokerage account those will all count against them.

Yes,  but if it is in an IRA (traditional or Roth, should be Roth for the kid) then they do not look at it at all. Obviously they'll look at her income, but not the IRA funds.

wae said:

I think the only way to have that kind of money saved up is going to involve a tax bill.  You can lock the money up for specific reasons by doing a 529 or opening an IRA (can a minor have an IRA?  I don't know..  never looked in to that) to not have taxes, you can stuff the matress full of cash and not have taxes (and I would include savings acounts as stuffing a matress full of cash because evn 2% isn't worth it for the amounts of money we're talking about here), or you can put it somewhere that it will remain liquid, make money, and incur tax liability.

Death and taxes, my friend.

The IRA and Roth bring up am interesting point. While child modeling is definitely NOT in the cards for my demon, I do own a business and have been looking at the requirements and pros and cons of hiring the children. From what I can see I can legally put them on the books at 14, yet I see some of the 1%ers hiring their children from birth. It's a good way to tax free them up to $12k a year and opens them up to investment accounts from an early age.

I've not looked nearly hard enough at it, but my CPA friend says his clients do it all the time, so once I'm really turning a profit I'm going to look into it much harder. 

To add onto what STM317 was saying, if you put in $2,500 into an IRA when she's 5 (we will assume that your CPA friend has figured out a way for her to have income), and put in $500 a year each year until she's 22, she'll have a $23,300 (todays dollars, assumes 7% return after inflation) head start on her retirement.

EDIT: Ignoring any further contributions after age 22, that $2,500 and $500 annual contributions from ages 6 to 22 would grow to $100k by the time she's 44 and $200k by the time she's 54. I'd think she would appreciate that more in teh long term than a $5k car.

If you want, I can send you a spreadsheet with all of this mapped out. 

In reply to Duke :

I did not know that about the 529.

So glad I stopped that.

Now to open an investing account or two under her name and pump some money in to it, I suppose.

FuzzWuzzy said:

In reply to Duke :

I did not know that about the 529.

So glad I stopped that.

 

Now to open an investing account or two under her name and pump some money in to it, I suppose.

Another potential issue with the 529, and my personal situation:

My dad had opened up a 529 for me when I was young. He saved to it planning on me going to an out of state school. Well, I went to an instate school, got some scholarships, got 11 credit hours in high school... Long story short, I graduated and had $20k left in the 529 plan. I couldn't get it out. Would have liked to use it for our mortgage, but couldn't without paying a 10% fine. Would have liked to use it when I or my wife was out of work. 

Now I can use it for my kids, but we potentially would run into the same or similar issues. Thankfully as of very recently, I can use it to pay my wife's student loans. I'm going to do that, but I still will have some money left over in it that I cannot get out.

wae said:

Duke said:

"Guess what?  Every dollar you have in your 529 is a dollar of financial aid your kid won't be getting," he continued.  Lots of the smug looks faded.  I don't know the actual statistics on 529s vs other investments and future FA, but locking that money up for a specific purpose that may not ever come to fruition doesn't seem to make a lot of sense.

As I understand it, that is also true of the kid having an investment account.  They'll look at every asset and if the applicant has a 529 or a custodial account, or if they're reached age of majority just a bank account/brokerage account those will all count against them.

That is true.  But there are FAFSA-invisible ways to invest money that is in the kid's name.

In reply to Duke :

As I understand it, a 529 owned by grandparents or some other adult not in custody of the kids doesn't count against them on the FAFSA.  The OP says college is already paid for, so the kids having assets doesn't matter since they won't need to fill in a FAFSA.  And it sounds like the OP has enough assets that they wouldn't likely get any aid anyway.

If you're dealing with self-managed assets I'd just open a Vanguard account and start averaging into aggressive growth ETFs since their time horizon is pretty long.  ETFs as opposed to mutual funds since they're taxed when you cash out of them so you don't have capital gains and dividends to pay taxes on along the way.  Vanguard as they're the king of low cost investing for the masses.

DirtyBird222 said:
I'd rather not put the money I'm putting away for them into riskier investments just for the fact I'd rather them have something than nothing.

I think the chance of a diversified stock investment (like VTSMX) going to "nothing" ranks right around the same as the chances of the US dollar going to "nothing."

I agree with a few others that a taxable investment account in her name at Vanguard or Fidelity put into VTSMX or other similar very low fee diversified index fund would be your best bet. A 3.5% CD isn't bad but it'll probably be more hassle as you'll have to keep rolling over into new CDs each time the term ends. You're likely to get more returns out of VTSMX.

FuzzWuzzy said:

In reply to Duke :

I did not know that about the 529.

So glad I stopped that.

 

Now to open an investing account or two under her name and pump some money in to it, I suppose.

Do more of your own research on the subject first. Any financial planner that says ever dollar in a 529 is a dollar of financial aid your kid won't get is an idiot at best, or a liar at worst. 

A parent owned 529 is treated far more favorably than a UGMA/UTMA or brokerage account in the financial aid calculations. Done correctly with grandparent help, the 529 can be completely ignored for financial aid while also not reducing the tax-advantaged amount you are able to contribute to your own retirement.

jwagner said:

In reply to Duke :

As I understand it, a 529 owned by grandparents or some other adult not in custody of the kids doesn't count against them on the FAFSA.  The OP says college is already paid for, so the kids having assets doesn't matter since they won't need to fill in a FAFSA.  And it sounds like the OP has enough assets that they wouldn't likely get any aid anyway.

Well kinda. The children, both my daughter and her older half sister are taken care of. The parents, being myself and their mom, really aren't. Since both of SWMBO parents were tenured professors, we kinda lucked into not needing to worry about paying for college or a trade school. The grandparents made sure of that, and luckily, they are much more in tune than my grandfather was with what is "good college" and "bad college".

I had a free ride to college, went 5 semesters, decided it wasn't worth my time and left. I'm barely keeping my head above water, but I'm doing better than a lot of the people I was in classes with that hadn't been sent there from work. 

I'd really rather just go to the bullion broker once a year and buy bars of metal in investment sized chunks, and with the market going up up up that seems like a better long run plan than throwing it into the market built on debt, but everybody will use their spreadsheets and faith in wall street to try to steer me away from that, so instead of just ignoring them, I want to hear them out.

jwagner said:

As I understand it, a 529 owned by grandparents or some other adult not in custody of the kids doesn't count against them on the FAFSA. 

Yes, but be careful. Any money that is transferred to the student becomes student income and is counted at 50% value, vs a mere 5.64% when the account is simply held directly by a parent.

However, for smaller accounts, waiting to distribute from grandparent 529 directly to the student until after the student files their last FAFSA will get around this. For larger accounts, transferring the funds from the grandparent 529 to the parent 529 immediately after FAFSA filing each year and then exhausting it all before the next FAFSA filing will do likewise for the entire duration of the student's education.

Duke said:

 

"Guess what?  Every dollar you have in your 529 is a dollar of financial aid your kid won't be getting," he continued.  Lots of the smug looks faded. 

 

That information is absolutely wrong. Parent owned 529s are looked at as parent assets. At most schools 5.6% is weighed against FA every year. More accurately every dollar in a 529 is 5 cents of FA the student won't be getting.

FuzzWuzzy said:

In reply to Duke :

I did not know that about the 529.

So glad I stopped that.

 

Now to open an investing account or two under her name and pump some money in to it, I suppose.

A school will want 50% of the students assets, every year.