Where to Put Money Set Aside for Kids

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Topic Author
almeida
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Joined: Sat Sep 08, 2012 4:09 pm

Where to Put Money Set Aside for Kids

Post by almeida »

Hi. This forum has helped me get my tax-advantaged retirement assets in order. Now, I'm looking for advice on where to put money that my wife and I are setting aside for our kids. Every month, we put a little bit into savings accounts for our kids. The accounts are in our name and we don't plan to ever tell the kids about this money. It's there so that, hopefully, we could help pay for a wedding, or contribute to a downpayment for a house, or, who knows, maybe bail them out of jail. Our parents helped us and we want to do the same for our kids if we can.

If things go right, we won't touch this money for 15 to 20 years, maybe longer. At our current contribution rate and with that kind of time horizon, we will have put away something on the order of mid five figures per kid. It's not a huge amount of money, but hopefully enough to help with something. If a true financial emergency occurred, we would use this money for ourselves, so we count it as part of our emergency fund even though that's not the intent. We have almost nine months of emergency funds in cash, excluding these accounts, so this money is really the tail end of the emergency stash.

So: it's in our names, it's taxable, we have a long time horizon, and it's part of our emergency fund but some volatility is okay. Where should we put this money? Right now, it's in regular savings accounts making less than 1% interest. I was thinking of a three-fund lazy portfolio. If we went that route, we'd probably use one of the target retirement funds until the balances grow a bit higher. Does that make sense? What sort of mix should we use? For comparison, we're using Rick Ferri's Core Four for our retirement with 20% in bonds (age - 10, roughly), 48% in domestic stock, 24% in international stock, and 8% in REIT.

And, before anyone asks: we are maxing out our tax-advantaged accounts, including my 401(k), my HSA, and both of our IRA. We have no taxable retirement savings. We do not have any 529s set up. As I said, this is technically part of emergency fund, so we didn't want to tie it up in a 529. Also, we believe (or maybe just hope) that the current approach to higher education in the US is not sustainable and that things will change before our kids go to college. Even if that doesn't happen, our kids are dual citizens and could go to great schools in the other country for much cheaper than equivalent schools in the US.

I'd appreciate any suggestions you might have, including opinions on whether this is even a good idea at all. Thanks for the help.
OverTheHill
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Re: Where to Put Money Set Aside for Kids

Post by OverTheHill »

I would probably opt for Vangaurd's short-term investment grade bond fund until you get at least as much as you think you might ever need as an emergency fund. After that, you might want to put some in intermediate investment grade and SP500 in order to get some growth, while still being very conservative with the money. There are many ways to do this, so take your time to find something that you're comfortable with.
Skiffy
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Re: Where to Put Money Set Aside for Kids

Post by Skiffy »

Sounds like you might be high-income earners, but have you considered a Roth? I guess the trouble with this approach would be you could only pull on contributions w/o penalty--
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LowER
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Re: Where to Put Money Set Aside for Kids

Post by LowER »

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Last edited by LowER on Sun Aug 24, 2014 7:18 pm, edited 1 time in total.
mickens16
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Re: Where to Put Money Set Aside for Kids

Post by mickens16 »

I can only tell you what I do as I think it's the best for our situation. I have 2 young children (5 and 2) and we set money aside in three different areas. A small amount goes into an Ally savings account every two weeks. A larger amount goes into the Virginia 529 plan, all in Vanguard funds. Right now the funds are Total Stock (30%), Total International (30%), Total Bond (30%), and Reit (10%). Lastly, we put money into a Vanguard Brokerage account; VT-Total World Stock (70%) and Intermediate Tax Exempt (30%). We'll be changing the level of risk as they get older. My goal for the cash is to be able to help them when they get older for a car purchase, etc. And the money at Vanguard I would like to open a Roth with that once they start working.
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almeida
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Re: Where to Put Money Set Aside for Kids

Post by almeida »

I think we have enough in our emergency fund, even without counting this money. The nine month figure doesn't count unemployment, disability, available credit on our credit cards, scaling back our lifestyle, etc. It's a really conservative estimate and it's still more than what most people suggest for an emergency fund. That's why I'm starting to think about investing some of it.

I wasn't aware of UTMA, so I looked it up. UTMA and UGMA won't work for this because the kids would get the money when they turn 21 and we'd lose all control. We view it as our money, not theirs. They'll get it if they're good kids and if there's something worthwhile we can help them with, like a wedding or a house. UTMA and UGMA may be something we look at for other purposes though. Thanks for the suggestion.

We did Roth IRAs for 2012. Most our retirement is in traditional accounts though. What's your thinking there? That'd we pull from Roth contributions (without penalty) for their weddingg (or whatever)? That seems like a bad use of our retirement funds, no? Are you suggesting this so we'd also have it for emergencies if necessary? That's a reasonable idea, but we're already maxing out my 401(k), IRAs, and HSA, so what we save for the kids is already extra savings.
Last edited by almeida on Tue Apr 30, 2013 9:17 pm, edited 1 time in total.
mickens16
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Re: Where to Put Money Set Aside for Kids

Post by mickens16 »

almeida wrote:We did Roth IRAs for 2012. Most our retirement is in traditional accounts though. What's your thinking there? That'd we pull from Roth contributions (without penalty) for their weddingg (or whatever)? That seems like a bad use of our retirement funds, no? Are you suggesting this so we'd also have it for emergencies if necessary? That's a reasonable idea, but we're already maxing out my 401(k), IRAs, and HSA, so what we save for the kids is already extra savings.
I apologize, I should have been more clear. I wasn't implying I would open a Roth for us, but once they start working and receive income I would open Roth's for them.

http://www.kiplinger.com/article/saving ... h-ira.html
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archbish99
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Re: Where to Put Money Set Aside for Kids

Post by archbish99 »

I see a couple options. One would be a UTMA, but you want the ability to reclaim funds at need, not disperse them, etc. Another would be to just invest the money as part of your portfolio and know you have enough to help them if/wgen you choose. The drawback there will be the gift limit, which will apply in the year you give them money and may be a limitation.

You might also consider a trust, either revocable or irrevocable. You could specify conditions for distribution that would persist even after your death, or you could give discretion to the trustee and appoint yourself. That might have tax ramifications, however.

Depends how set you are on control, and how much money you're talking about.
I'm not a financial advisor, I just play one on the Internet.
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dm200
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Re: Where to Put Money Set Aside for Kids

Post by dm200 »

almeida wrote:Hi. This forum has helped me get my tax-advantaged retirement assets in order. Now, I'm looking for advice on where to put money that my wife and I are setting aside for our kids. Every month, we put a little bit into savings accounts for our kids. The accounts are in our name and we don't plan to ever tell the kids about this money. It's there so that, hopefully, we could help pay for a wedding, or contribute to a downpayment for a house, or, who knows, maybe bail them out of jail. Our parents helped us and we want to do the same for our kids if we can.

If things go right, we won't touch this money for 15 to 20 years, maybe longer. At our current contribution rate and with that kind of time horizon, we will have put away something on the order of mid five figures per kid. It's not a huge amount of money, but hopefully enough to help with something. If a true financial emergency occurred, we would use this money for ourselves, so we count it as part of our emergency fund even though that's not the intent. We have almost nine months of emergency funds in cash, excluding these accounts, so this money is really the tail end of the emergency stash.

So: it's in our names, it's taxable, we have a long time horizon, and it's part of our emergency fund but some volatility is okay. Where should we put this money? Right now, it's in regular savings accounts making less than 1% interest. I was thinking of a three-fund lazy portfolio. If we went that route, we'd probably use one of the target retirement funds until the balances grow a bit higher. Does that make sense? What sort of mix should we use? For comparison, we're using Rick Ferri's Core Four for our retirement with 20% in bonds (age - 10, roughly), 48% in domestic stock, 24% in international stock, and 8% in REIT.

And, before anyone asks: we are maxing out our tax-advantaged accounts, including my 401(k), my HSA, and both of our IRA. We have no taxable retirement savings. We do not have any 529s set up. As I said, this is technically part of emergency fund, so we didn't want to tie it up in a 529. Also, we believe (or maybe just hope) that the current approach to higher education in the US is not sustainable and that things will change before our kids go to college. Even if that doesn't happen, our kids are dual citizens and could go to great schools in the other country for much cheaper than equivalent schools in the US.

I'd appreciate any suggestions you might have, including opinions on whether this is even a good idea at all. Thanks for the help.
As you describe the situation, I think I would put this money into several equity funds, since it is intended for long term. Perhaps, a small part in a bond fund or Bank CDs, so that when some is needed earlier, that money is not as subject to market risk. If you wanted to be completely risk averse, a ladder of federally insured CDs going out 5-7 years.
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jasonv
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Re: Where to Put Money Set Aside for Kids

Post by jasonv »

If you are able to truly commit to a 20 year time horizon, then EE Savings Bonds are one of the best deals out there right now given that they guarantee 3.5% over 20 years. Being free from state income tax (and federal income tax when used for education) is an added bonus.
Topic Author
almeida
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Re: Where to Put Money Set Aside for Kids

Post by almeida »

Thanks for all the suggestions. I'm going to look into EE bonds and some of Vanguard's target funds for now. I think that's a reasonable start to increase the earnings compared to a traditional savings account. I'll also keep UTMAs and Roth IRAs in mind for the future. Thanks again.
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momar
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Re: Where to Put Money Set Aside for Kids

Post by momar »

I don't see why you need to set this aside and invest it specifically for your kids. It would be one thing if it was in their name and they were going to take control of it at 18. But for this case? It just seems like mental accounting to me.

Invest it according to your allocation. Then when the time comes to help your kids with whatever you might want to help them with, give them the amount of money you want to give them.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
livesoft
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Re: Where to Put Money Set Aside for Kids

Post by livesoft »

I agree with momar. Forget about mental accounting and just invest for yourselves. If you want to give money to your kids, then give money to your kids. Don't make it complicated because it is not complicated.
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FlyOverState
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Re: Where to Put Money Set Aside for Kids

Post by FlyOverState »

My six year old was born after both my parent passed. Last year, in my taxable account, I put the equivalent of the RMD from my inherited IRA in VTTSX (Vanguard Target Retirement 2060 Fund). The mental accounting is simple, it’s the only TR fund I have. His grandparents may be gone, but they can still contribute to his future/retirement. The money is in my taxable account so if things go south, I can still claim it. Hopefully I won’t need it and it can grow for 60+ years.
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allocator
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Re: Where to Put Money Set Aside for Kids

Post by allocator »

livesoft wrote:I agree with momar. Forget about mental accounting and just invest for yourselves. If you want to give money to your kids, then give money to your kids. Don't make it complicated because it is not complicated.
Agree.

But I also want to present an alternative my wife and I are discussing (we have kids just a couple of years older than yours). How about spending the money now or in the near future on lessons/activities/vacations/learning opportunies/camp, etc., that could be enriching for them, as long as you have adequate emergency funds? You could get really creative with this and the "dividends" from this kind of investment (yes, investment!) could flow to them for the rest of their lives. Added bonus: you get to see it and enjoy it with them.
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momar
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Re: Where to Put Money Set Aside for Kids

Post by momar »

allocator wrote:
livesoft wrote:I agree with momar. Forget about mental accounting and just invest for yourselves. If you want to give money to your kids, then give money to your kids. Don't make it complicated because it is not complicated.
Agree.

But I also want to present an alternative my wife and I are discussing (we have kids just a couple of years older than yours). How about spending the money now or in the near future on lessons/activities/vacations/learning opportunies/camp, etc., that could be enriching for them, as long as you have adequate emergency funds? You could get really creative with this and the "dividends" from this kind of investment (yes, investment!) could flow to them for the rest of their lives. Added bonus: you get to see it and enjoy it with them.
Of course you should spend money on activities for your kids. Have your kids just been sitting around in the dark?
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
Sweet Betsy
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Re: Where to Put Money Set Aside for Kids

Post by Sweet Betsy »

Not sure how much accessibility you want but if you want accessibility after a year and need no-risk look at I-bonds when you are looking at EE bonds. This would be good especially if you'll be considering this as part of your EF. If the the money helps you pay for college there are tax advantages as well.

For me considering that everything else is fully funded and you have a sizable EF, I'd just pick a Mutual Fund and throw it all in there. Set up automatic investments and just check in on it every once in a while.
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StormShadow
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Re: Where to Put Money Set Aside for Kids

Post by StormShadow »

Getting your kids to do some part-time work and contributing a Roth IRA for them is a terrific idea. This is what I plan to do for my children. They can do whatever part-time job they want and would get to keep whatever they make. For every dollar they earn, I would contribute the same amount to their Roth IRA for that year.

I also think you should re-consider starting a 529 for your kids. Regardless of what you speculate will happen in the future with US education.... tuition is not going to be free. 529's are very flexible. They can be used to pay for college, grad school and vocational school. They can be used to pay for books, tuition, fees and even rent while in school. They can be transferred to another person without penalty.

That all said, its not a good idea to have "emergency funds" tied up in equity investments. If the market crashes, then you've defeated the whole purpose of having an emergency fund.
lovelife
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Re: Where to Put Money Set Aside for Kids

Post by lovelife »

I agree with mommar aswell.
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