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Best account structure to invest for child.


orthopa
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I have been researching the best way to save/invest for a child outside of a 529 plan. I plan on maxing out a 529 plan for my daughter but would like a way to invest money for her to use for a house downpayment/first car or preferably to just let sit and grow over her life time.

 

I was under the impression that a custodial account or guardian account was a good option but apparently after some research it isn't.

 

http://fairmark.com/custacct/regret1.htm

 

These accounts count more heavily against college financial aid, 4 times as much and the tax break limits are very low.  There is also the often unappealing idea of giving a lot of money to an 18 year old and what they will spend it on.

 

It seems just having an account earmarked for a child and gifting either stock or cash from the account over time is the best way to go about this.

 

Has anyone done something similar and have any experience or thoughts?

 

Thanks

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If they earn money from summer jobs, you can put it in a Roth for them- then again not accessible until age 60

Otherwise something like Berkshire that does not pay a dividend and is a tax efficient way to let capital compound .

That's what I have done for my kids outside of 529s [ but held it under mine and my wife's accounts].

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My answer from 2009:  http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-do-you-teach-your-family-about-finance-or-business/msg7270/#msg7270

 

My kids are 15 & 16 now and they have more than $10K each in their UTMA accounts just from small allowances, doing odd jobs for others, birthday/christmas money, and capital gains of course.

 

The down side is that it is their money to do what they want with on their 18th birthday's, but it is their money, so that is how it should be.

 

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I dont have kids yet, but here is an ideal i thought of:

Setup a partnership between all family members.

Each year u put some money in for u and your wife, and also put in 10k as gift for each child.

The children can put their money into it too. This include the money they earned through part time jobs.

Whoever need to withdraw money need to get approved by all partners, and you can only do it once per year.

 

The advantages of this setup is:

1. You give ur children 10k tax free per year very early on

2. You encourgae the children to partipate in managing their money early on.

3. You encourage the children to work, earn money, and learn from a young age saving is important. You can pay them to throw up trashes, wash dishes, etc, so they earn money toward the partnership.

4. You have a control/say on a significant porton of your kids' money by the time they are in college. Most importantly, you get to use this money to play in the stock market :)

 

Again, i dont have kids yet, but i thought this might work? :)

 

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My answer from 2009:  http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-do-you-teach-your-family-about-finance-or-business/msg7270/#msg7270

 

My kids are 15 & 16 now and they have more than $10K each in their UTMA accounts just from small allowances, doing odd jobs for others, birthday/christmas money, and capital gains of course.

 

The down side is that it is their money to do what they want with on their 18th birthday's, but it is their money, so that is how it should be.

 

Hands down this is the best way to go.  Have a UTMA for the oldest, need to set up accounts for the other two.  You just put money in there and it builds up.  My plan is to encourage my oldest to save with a matching type system.  You earn $5, save $2.50 and I'll give him another $5 on the match, or something even more generous.  But the key is the match and savings go to the UTMA.

 

They can get at it at 18, and that's fine with me.  I think in some ways it's a good check on parenting.  Does the thought of your kid getting money they saved at 18 frighten you?  If so then why? And that's an opportunity to teach them or get involved.

 

We've encouraged our kids to have the mentality that work = pay.  We have expectations around the house, but jobs above and beyond can be done for a price.  Help me bag the billions of leaves in the front yard? That's a few extra bucks.  Help straighten up the garage? Same thing, more cash.

 

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My answer from 2009:  http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-do-you-teach-your-family-about-finance-or-business/msg7270/#msg7270

 

My kids are 15 & 16 now and they have more than $10K each in their UTMA accounts just from small allowances, doing odd jobs for others, birthday/christmas money, and capital gains of course.

 

The down side is that it is their money to do what they want with on their 18th birthday's, but it is their money, so that is how it should be.

 

Hands down this is the best way to go.  Have a UTMA for the oldest, need to set up accounts for the other two.  You just put money in there and it builds up.  My plan is to encourage my oldest to save with a matching type system.  You earn $5, save $2.50 and I'll give him another $5 on the match, or something even more generous.  But the key is the match and savings go to the UTMA.

 

They can get at it at 18, and that's fine with me.  I think in some ways it's a good check on parenting.  Does the thought of your kid getting money they saved at 18 frighten you?  If so then why? And that's an opportunity to teach them or get involved.

 

We've encouraged our kids to have the mentality that work = pay.  We have expectations around the house, but jobs above and beyond can be done for a price.  Help me bag the billions of leaves in the front yard? That's a few extra bucks.  Help straighten up the garage? Same thing, more cash.

 

 

That is my thought exactly.  I mentioned it as a downside, because that was the most common caution I received when I was asking for advise before setting up the accounts and the most common criticism people gave me afterward when I would talk about it.  My thought is that it is their money they should have it.  I didn't do the matching thing you mentioned.  I saved for them in 529 plans, and I plan on helping them buy their first cars and pay for college.  Their UTMA accounts were entirely theirs right from the start.

 

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I did UTMAs back when they were young. Now the one's that work have a Roth. I mostly do odd lot tenders and the like in the accounts which is great for small accounts. I skipped the 529 route for the most part which was probably a mistake. I didn't like the fact that you couldn't actively manage the 529 accounts.

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Guest longinvestor

I did UTMAs back when they were young. Now the one's that work have a Roth. I mostly do odd lot tenders and the like in the accounts which is great for small accounts. I skipped the 529 route for the most part which was probably a mistake. I didn't like the fact that you couldn't actively manage the 529 accounts.

 

+1.

 

That said, there is a 529  loophole of sorts you can take advantage of (to avail state tax benefits). Fund a 529 during the years your kid is in college and withdraw almost immediately. There is no holding period requirement with 529's. In other words, you can invest as you please in another account, for as  many years as have, and then funnel it in and out of the 529 during the college spending years. I live in IL and the tax benefit is not huge but hey, why let it go?

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I got a UTMA for my son and bought a few shares of berkshire.  I decided that it was more important to teach him the basic lessons about investing in equities than to try to earn higher returns with strategies he won't understand like odd-lot tenders and the like (and anyway I got tired of that stuff).  As he gets older it will provide countless opportunities to discuss investing because their businesses are everywhere and every time we get an ice cream from dairy queen or watch a BNSF train go by I can explain that part of those earnings belong to him.  Maybe it will get him interested in saving and investing.  Then again maybe it will backfire and I'll just be an annoying dad who won't shut up about this stuff.  Also if you are rich enough to care about it, keep in mind UTMAs can be taxed as part of your estate if you die before they turn 18.

 

In my state 529 plan contributions are tax deductible for state taxes which is nice, and you don't necessarily have to withdraw the money when you get to college age.  I am not sure on the restrictions but maybe it's possible to just keep the money compounding tax deferred for his whole lifetime?  With a coverdell you do have to pull the money out by age 30 and you can't put much in it, but there are fewer restrictions on investments so you might get a higher rate of return if you're a good investor.

 

It is hard to make blanket recommendations on these things.  Everyone has a different situation and it's probably wise to get an adviser at least in the beginning just to make sure you aren't doing something stupid.

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I got a UTMA for my son and bought a few shares of berkshire.  I decided that it was more important to teach him the basic lessons about investing in equities than to try to earn higher returns with strategies he won't understand like odd-lot tenders and the like (and anyway I got tired of that stuff).  As he gets older it will provide countless opportunities to discuss investing because their businesses are everywhere and every time we get an ice cream from dairy queen or watch a BNSF train go by I can explain that part of those earnings belong to him.  Maybe it will get him interested in saving and investing.  Then again maybe it will backfire and I'll just be an annoying dad who won't shut up about this stuff.  Also if you are rich enough to care about it, keep in mind UTMAs can be taxed as part of your estate if you die before they turn 18.

 

In my state 529 plan contributions are tax deductible for state taxes which is nice, and you don't necessarily have to withdraw the money when you get to college age.  I am not sure on the restrictions but maybe it's possible to just keep the money compounding tax deferred for his whole lifetime?  With a coverdell you do have to pull the money out by age 30 and you can't put much in it, but there are fewer restrictions on investments so you might get a higher rate of return if you're a good investor.

 

It is hard to make blanket recommendations on these things.  Everyone has a different situation and it's probably wise to get an adviser at least in the beginning just to make sure you aren't doing something stupid.

 

My understanding about the 529 is that there is no age limit and you can change the beneficiary at any time to anyone.  So if your child doesn't use the money you can change the beneficiary to your grandchild or your niece/nephew, second cousin's kid, your neighbor's grandchild's friend's brother's kid, etc.  I could be wrong, but that is how I think it works.

 

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Since there's no tax benefit for the owner in California, I looked for the state with the lowest expense ratios.

 

The NY state 529 offers Vanguard funds at a flat 16 basis points and the money grows tax free. There's no need to be a resident of NY.

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I have been researching the best way to save/invest for a child outside of a 529 plan. I plan on maxing out a 529 plan for my daughter but would like a way to invest money for her to use for a house downpayment/first car or preferably to just let sit and grow over her life time.

 

I was under the impression that a custodial account or guardian account was a good option but apparently after some research it isn't.

 

http://fairmark.com/custacct/regret1.htm

 

These accounts count more heavily against college financial aid, 4 times as much and the tax break limits are very low.  There is also the often unappealing idea of giving a lot of money to an 18 year old and what they will spend it on.

 

It seems just having an account earmarked for a child and gifting either stock or cash from the account over time is the best way to go about this.

 

Has anyone done something similar and have any experience or thoughts?

 

Thanks

 

If you max the 529, you probably shouldn’t worry about not getting financial aid.  There will be too much money for them to get any need-based aid anyway.

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I have been researching the best way to save/invest for a child outside of a 529 plan. I plan on maxing out a 529 plan for my daughter but would like a way to invest money for her to use for a house downpayment/first car or preferably to just let sit and grow over her life time.

 

I was under the impression that a custodial account or guardian account was a good option but apparently after some research it isn't.

 

http://fairmark.com/custacct/regret1.htm

 

These accounts count more heavily against college financial aid, 4 times as much and the tax break limits are very low.  There is also the often unappealing idea of giving a lot of money to an 18 year old and what they will spend it on.

 

It seems just having an account earmarked for a child and gifting either stock or cash from the account over time is the best way to go about this.

 

Has anyone done something similar and have any experience or thoughts?

 

Thanks

 

If you max the 529, you probably shouldn’t worry about not getting financial aid.  There will be too much money for them to get any need-based aid anyway.

 

That maybe true but who knows what college may cost, esp with room and board. It maybe $100k a year or more in 18 years. Like you said the 529 should cover the majority and some loans are needed she can learn the responsiblity that comes with that.

 

If it was purely my daughters money that she put in I would be totally fine with her having access at 18, 21. It would just break my heart  to have an account i built for her over time spent on a boyfriend or in a wasteful manner.

 

I guess it just comes down to personal preferences and tolerances like anything else.

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I had some money in an account with no controls at a young age. Given the amount of money it wouldn't have made sense to start a trust, but a 529 would have been a good option if that was around. For me it was a good learning experience in saving / investing. I actively managed the funds starting at a young age with guidance as I suspect your beneficiary would.

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