Best place to put infant's money

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happymob
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Best place to put infant's money

Post by happymob »

Our 1-year-old and 3-year-old each have modest (low thousands of dollars) that they have received as gifts. This was clearly gifts to them and not gifts to us (the parents) to use for them. Obviously we have to manage the money right now. Up until now, the 2% they received in their bank kiddie account seemed like a fine place to park the money. But the kiddie account interest rate recently went to 0.25%. Ugh. Not so great. So, I'm trying to formulate a plan on where to go with this money. I've considered the following:

1) EE Savings Bonds and filing a tax return for them each year in order to pay the interest every year. They really shouldn't need the money for 20 years (though college doesn't adds a wrinkle), so the doubling after 20 years (with some of the interest already "paid") seems fairly attractive.

2) I Bonds and paying the interest off every year. 0% real (with no tax consequences for the real compenent) sounds kind of "bleh", but at least we have more flexibility if we want to change course mid-stream and it should keep up with inflation (though not necessarily college tuition inflation).

3) Intermingle their funds with ours and gift them their money later. We would have to track their gains manually (which we can do, but it's some non-trivial effort). We could (unlikely) also abscond with their funds at some point in the future. There are lifetime gift tax limits as well, and we might trigger these (again, probably unlikely, but there is a "family farm" involved in the family, so estate planning over multiple generations is a real issue - in other words, a single gift at age 18 or 21 might prevent some gifting later in life).

4) Go with 0.25% now (or find a better bank) and put their money in that.

5) Buy 5-year CDs at whatever the current 5-year CD rate is (1.5% APR at our current bank). Obviously we can shop around for both option 4 and option 5 to get better rates and #4 provides more flexibility and #5 provides some shortish-intermediate (5 years isn't that long...) rate risk.

6) Open a Vanguard account and buy the best fund that they have the minimum amount of money to qualify for (they are close enough to or over the $3000 amount that I would supplement it, if necessary to get there, so I don't think we'd have to go with STAR - not that I think there is anything particularly wrong with STAR as it serves a need).

While I didn't mind parking money at 2%, 0.25% is simply foolish. I'm personally leaning towards option 6 (get them brokerage accounts at ages 1 and 3), but I am very curious if anyone wants to make an arguments for savings bonds (of either sort), or something else. I would sort of like them to start "controlling" the money sometime between the age of 10 and 15 (we'll figure out what age when the time comes), as I feel there is value (particularly when the risk of significant loss is low) to get them thinking about finances. To some extent, when they seem reasonably mature, if they want to put all their money into APPL or MCD, well let them - maybe they will learn a valuable lesson when the stakes are low. Or they can be Bogleheadish. So I like the flexibility that every option except #1 offers. I'm also particularly curious about the community's thoughts on intermingling funds and the complications involved with that and later unwinding the intermingling.
investingholder
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Re: Best place to put infant's money

Post by investingholder »

I had a similar question recently. Here is the thread. Hope it helps.

http://www.bogleheads.org/forum/viewtop ... 1&t=112053
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Peter Foley
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Re: Best place to put infant's money

Post by Peter Foley »

A couple thoughts: Schwab has lower minimums for accounts than Vanguard so if you want to go the mutual fund route I would try Schwab and would set up a minor's account (trust account). You have at least a 15 year investment period - this is the route I would choose.
The EE-Bonds are also not a bad route - but be careful how you title them. I think it may make a difference if they are used for post secondary espenses.
I-bonds - I wouldn't go this route. You will only maintain purchasing power with no chance for gains.
With 5 year CD's you are almost guarranteed to lose purchasing power.

I don't like the idea of buying EE bonds and paying tax on them because that backfired on me. I expected to pay at the child's rate until they were cashed. In the meantime my mother gave each of my kids a few thousand dollars for college eduction. I invested it in active funds (my pre Boglehead years) and it did well. Then the tax rules changed and created a nightmare. The kids' income had to be taxed at my rate, so I had to calculate and declare the EE bond income every year. Both my taxes and my kids were horribly complicated for a period of 3-5 years. Since EE bonds are tax free if used for education, I would not go the route of paying taxes on the interest each year (I know, you only have to declare the first year and then you are OK until they are cashed -usually).
RobInCT
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Re: Best place to put infant's money

Post by RobInCT »

Why not 529s for each of them in Target Retirement Date 2030?
letsgobobby
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Re: Best place to put infant's money

Post by letsgobobby »

RobInCT wrote:Why not 529s for each of them in Target Retirement Date 2030?
We put a similar amount of money in Vanguard target date 2060 funds. $1000 minimums, tax efficient, low cost. Will probably harvest any gains down the road while it is still free for them to reset their basis.
STC
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Re: Best place to put infant's money

Post by STC »

Personally, I would put 50/50 in VBR/VSS. A lifetime is a long horizon...
Calm Man
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Re: Best place to put infant's money

Post by Calm Man »

I like #6. From your preamble, I was surprsied you even indicated commingling as an option but you put so much emphasis that you would have to track it that you obviously are in the right place. I strongly suggest doing what I did, which is to simply use the STAR fund. The older one of mine is now 26 and has the STAR fund still in her ROTH IRA. The STAR money in her taxable will eventually be moved when her tax bracket hopefully rises. Although a life strategy might be somewhat less costly, the STAR fund is a good solid 70/30 fund, and although actively managed has good memories for us.. Good luck and you're a great parent.
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happymob
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Re: Best place to put infant's money

Post by happymob »

investingholder wrote:I had a similar question recently. Here is the thread. Hope it helps.

http://www.bogleheads.org/forum/viewtop ... 1&t=112053
Thanks. As a summary for those not clicking the link, the suggestions were 529 vs. UTMA. UTMA has the advantage of control of the money before 18 in Oklahoma (UGMA is 21, oddly enough) combined with the disadvantage of full control by recipient by a potentially immature child at 18 (or 21). 529 has the disadvantage of penalties for non-qualified withdrawals.

I hadn't considered a UTMA rather simply co-mingling funds. That seems like a reasonable idea given that the money is clearly the kids' money, we have some control over it until 18, we have no extra bookkeeping (outside of kiddie tax issues, which shouldn't be an issue), and we can give them some input over investments when they are teenagers to teach them about investing.

No love at all for savings bonds sort of surprises me in the responses so far.

I'm reluctant to do the 529 plan, because if we are the owners, then it is still our money, technically (though this is no different than co-mingling funds). And if the kids are the owners, there is no tax break plus you have the penalty for non-qualified withdrawals. I figure if the money was necessarily intended for higher ed and nothing else, the gifter should have setup a 529 themselves and received the state tax break (which was possible for these gifts). While I would love both kids to go to college, and I suspect they both will, this isn't a guarantee.
Grt2bOutdoors
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Re: Best place to put infant's money

Post by Grt2bOutdoors »

EE bonds if you hold for 20 years. Report the annual interest yearly, to lower any tax impact upon maturity.
STAR fund/Target Retirement/Lifestrategy Moderate/Growth. UTMA account - it's their gift money, not yours.
A combination of the above is what I did for my child.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
sscritic
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Re: Best place to put infant's money

Post by sscritic »

Your children can own their own 529s through a UTMA. They are called UTMA 529s. I wonder why?

P.S. You can switch the reporting of savings bond interest from annual to redemption if you reach a point where annual reporting gets complicated. google, but put irs into your search.
RobInCT
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Re: Best place to put infant's money

Post by RobInCT »

I appreciate your desire not to put your child's money in your name, but realistically, your children cannot and should not be making any decisions about this money for more than a decade, and in the meantime, you have to be the guardian/custodian/trustee of the funds, as I assume the person who gave the children the money realized.

If you open 529s for the children with you as the owner, you will receive a tax benefit and could add additional funds to the 529s equal to the tax benefit you are receiving, giving the children more money overall than they would have had if you'd just put them in their names alone. This would increase the amount of money the children have but would not foreclose the option of transferring ownership to the children outright at some later date.

Assuming you intended to make at least some contribution towards your children's college educations, if one of them decides not to go, you could transfer the funds from the child who doesn't go to the child who does and then simply give the child who does not attend a lump sum equivalent to whatever the the 529 would have been. You're only in a difficult spot if neither of them goes.

Lastly, I don't know your financial situation, but if there is any chance your children might be eligible for financial aid for college, it will be to their financial benefit for the funds to be in your name rather than theirs since the formula for federal financial aid "taxes" money held by the student at a much higher rate than money held by a parent. Having the funds held in a 529 in account of which you are the owner might increase the need-based grants your children receive and decrease their need to rely on loans.

Obviously, do what you feel is right, but you should weigh abstract concerns about the ethics of account title against concrete advantages and disadvantages (from the perspective of the children) to having the money in their names. It's not clear-cut and depends a lot on family circumstances/predictions of the future.
mikep
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Re: Best place to put infant's money

Post by mikep »

Grt2bOutdoors wrote:EE bonds if you hold for 20 years. Report the annual interest yearly, to lower any tax impact upon maturity.
STAR fund/Target Retirement/Lifestrategy Moderate/Growth. UTMA account - it's their gift money, not yours.
A combination of the above is what I did for my child.
Even if you report the interest annually on the EEs most of it is in year 20. 0.2% for first 19 years ..
Grt2bOutdoors
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Re: Best place to put infant's money

Post by Grt2bOutdoors »

mikep wrote:
Grt2bOutdoors wrote:EE bonds if you hold for 20 years. Report the annual interest yearly, to lower any tax impact upon maturity.
STAR fund/Target Retirement/Lifestrategy Moderate/Growth. UTMA account - it's their gift money, not yours.
A combination of the above is what I did for my child.
Even if you report the interest annually on the EEs most of it is in year 20. 0.2% for first 19 years ..
Every little bit helps.......
OP asked about savings bonds, so I put it up as an option - let the kids/soon to be adults decide what to do at 20 years, the good thing is exemption amounts are likely to grow over the next 20 years and will probably eliminate most of any tax liability at that point.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
DTSC
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Re: Best place to put infant's money

Post by DTSC »

IMHO, treat it as *your* money. The people who gave them the money intend that you will be spending/investing it on your children's behalf. I presume the givers didn't earmark it as "Susie's College Fund" or something like that. Money is fungible anyway, so the $5000 that you didn't have to save for college can be spent on food, diapers, rent, or luxury items. As long as you don't spend it on a cruise for just Mommy and Daddy, or a diamond ring that only you can wear, I think it's fine. Since I think you should consider it your money, I think you should put it into a 529 plan and be done with it. This is especially true if you get a tax break from your state. Ethically, I don't think the givers would have a bone to pick with saving for your children's future education either.
yolli71
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Re: Best place to put infant's money

Post by yolli71 »

RobInCT wrote:I appreciate your desire not to put your child's money in your name, but realistically, your children cannot and should not be making any decisions about this money for more than a decade, and in the meantime, you have to be the guardian/custodian/trustee of the funds, as I assume the person who gave the children the money realized.

If you open 529s for the children with you as the owner, you will receive a tax benefit and could add additional funds to the 529s equal to the tax benefit you are receiving, giving the children more money overall than they would have had if you'd just put them in their names alone. This would increase the amount of money the children have but would not foreclose the option of transferring ownership to the children outright at some later date.

Assuming you intended to make at least some contribution towards your children's college educations, if one of them decides not to go, you could transfer the funds from the child who doesn't go to the child who does and then simply give the child who does not attend a lump sum equivalent to whatever the the 529 would have been. You're only in a difficult spot if neither of them goes.

Lastly, I don't know your financial situation, but if there is any chance your children might be eligible for financial aid for college, it will be to their financial benefit for the funds to be in your name rather than theirs since the formula for federal financial aid "taxes" money held by the student at a much higher rate than money held by a parent. Having the funds held in a 529 in account of which you are the owner might increase the need-based grants your children receive and decrease their need to rely on loans.

Obviously, do what you feel is right, but you should weigh abstract concerns about the ethics of account title against concrete advantages and disadvantages (from the perspective of the children) to having the money in their names. It's not clear-cut and depends a lot on family circumstances/predictions of the future.
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