Investing For Children

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PecuniaryPupil23
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Investing For Children

Post by PecuniaryPupil23 » Mon Jan 09, 2017 12:04 am

Hello all,
First time writer, long time fan. My wife and I just recently had our first child and I am looking for any advice as far as good investment strategies for the little guy (and possibly a future sibling). My wife and I are both in the military and have the advantage if the post 911 Bill, so I don't feel like a 529 would be very useful (perhaps I'm wrong). I have read some about UGMA/UTMAs as well that sound good (any experience? Tax pitfalls?). As far as our current investments we max out our TSP and Roth IRA with the rest going into Vanguard mutual funds. Please let me know your thoughts. Thank you in advance.

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CyclingDuo
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Re: Investing For Children

Post by CyclingDuo » Mon Jan 09, 2017 8:38 am

Congrats on the new addition to your family. Get a Social Security Number for him ASAP! :moneybag

Here's a good primer on UTMA/UGMA/529:

http://www.finaid.org/savings/ugma.phtml

We opened UTMA accounts for both of our children as soon as we had their SS#'s, and socked away as much as we could at the time. Our primary goal being saving for their college educations. We opened both accounts with $5K, and socked away at least $2-5K every year for the first 5-7 years.

Tax advantages: Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child's—usually lower—tax rate, rather than the parent's rate. For some families, this savings can be significant.

The two UTMA accounts we opened and held for 21 & 23 years respectively were in individual stocks that we managed. We were very fortunate to take advantage of the huge tech boom from 1993-2016. Enough wealth accumulated in their UTMA accounts to pay for their college educations, room/board, study abroad, fees, expenses and graduate debt free (well, the youngest graduates in May, but we just paid the final tuition bill last month!). There is even $77K leftover between the two accounts, and we just transferred that over to new accounts set up for both of them as they begin their own self-directed investing careers. Even in our wildest imaginations at the time we opened the UTMA's, we didn't imagine that final outcome.

Evaluate your tax situation, what you (and grandparents) can put into an account for junior - and get going early!

All the best. Get that SS Number!

Grt2bOutdoors
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Re: Investing For Children

Post by Grt2bOutdoors » Mon Jan 09, 2017 8:57 am

Here is a comprehensive and definitive guide to the benefits and negatives of using an UTMA account:

http://fairmark.com/kids-college/utma/
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: Investing For Children

Post by Grt2bOutdoors » Mon Jan 09, 2017 9:01 am

CyclingDuo wrote:Congrats on the new addition to your family. Get a Social Security Number for him ASAP! :moneybag

Here's a good primer on UTMA/UGMA/529:

http://www.finaid.org/savings/ugma.phtml

We opened UTMA accounts for both of our children as soon as we had their SS#'s, and socked away as much as we could at the time. Our primary goal being saving for their college educations. We opened both accounts with $5K, and socked away at least $2-5K every year for the first 5-7 years.

Tax advantages: Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child's—usually lower—tax rate, rather than the parent's rate. For some families, this savings can be significant.

The two UTMA accounts we opened and held for 21 & 23 years respectively were in individual stocks that we managed. We were very fortunate to take advantage of the huge tech boom from 1993-2016. Enough wealth accumulated in their UTMA accounts to pay for their college educations, room/board, study abroad, fees, expenses and graduate debt free (well, the youngest graduates in May, but we just paid the final tuition bill last month!). There is even $77K leftover between the two accounts, and we just transferred that over to new accounts set up for both of them as they begin their own self-directed investing careers. Even in our wildest imaginations at the time we opened the UTMA's, we didn't imagine that final outcome.

Evaluate your tax situation, what you (and grandparents) can put into an account for junior - and get going early!

All the best. Get that SS Number!


Congratulations, you used "lottery tickets" to pay for college :wink: , glad it worked out for you. Don't recommend folks or OP try to emulate this strategy, purchasing undiversified, concentrated risk securities usually does not turn out so well. Recommend using a stock index investing approach instead. View the wiki for primers on the 3 Fund Portfolio and creating your own Investment Policy Statement.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

kelvan80
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Re: Investing For Children

Post by kelvan80 » Mon Jan 09, 2017 9:59 am

My husband is active duty as well, 14 years. We do not count on the GI Bill and we have one going to college in four years and another 3 years later. I have always planned like that benefit may not be there. They are already talking about cutting the housing portion of it out so you may want to save in a 529 to help with that cost. If it is still available we will transfer to younger sibling who are just now turning two so the funds will have another 18 years to compound. Good luck!

NotWhoYouThink
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Re: Investing For Children

Post by NotWhoYouThink » Mon Jan 09, 2017 10:02 am

Once you put money in the UTMA, it is an irrevocable gift to the child. So if said child drops out of school to sell drugs or beg on the streets of Portland, for instance, you can't take back the money. Once your offspring come of age the money belongs to them. You can use it to pay for their rehab and therapy, if you can get them to participate, but you can't take the money back.

Just a warning that not all kids go to college, or grow into the people their parents hoped they would be. But the UTMA gift is irrevocable.

livesoft
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Re: Investing For Children

Post by livesoft » Mon Jan 09, 2017 10:04 am

Congrats on the first child. What fun you will have!

We didn't do anything special in terms of investing for our children. The reality is that it just didn't matter until they started earning their own money as teenagers. Grandma started small UTMA accounts for them which remained so small they are more a PITA. We started 529 plans when they were about 12. They are over 20-years-old now. Because 2008-2009 happened to these 529 plans, they didn't end up being big tax savings anyways.

When they started working, we gave them shares from our taxable account which they then sold (no cap gains tax on these small amounts) and then contributed cash to their Roth IRAs.
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Grt2bOutdoors
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Re: Investing For Children

Post by Grt2bOutdoors » Mon Jan 09, 2017 10:13 am

NotWhoYouThink wrote:Once you put money in the UTMA, it is an irrevocable gift to the child. So if said child drops out of school to sell drugs or beg on the streets of Portland, for instance, you can't take back the money. Once your offspring come of age the money belongs to them. You can use it to pay for their rehab and therapy, if you can get them to participate, but you can't take the money back.

Just a warning that not all kids go to college, or grow into the people their parents hoped they would be. But the UTMA gift is irrevocable.


And if said child is told from an early age that money saved is for college, chances are the child will attend a school of higher learning. But in the event, that doesn't look like it will occur, custodian can use money in the child's account for extracurricular activities that go beyond that of what is normally expected for a parent to provide. Things like that school trip to Montreal, Canada to learn about French Canadian history, music lessons, judo lessons to keep the drug dealers from getting too close :wink: , a used car to get from home to school and back, SAT prep courses, vocational training, etc.

And, when you have child start a part-time job for some "spending money", use the earnings to fund a ROTH, take the spending money out of the UTMA - it is their money after all. :wink:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

NotWhoYouThink
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Re: Investing For Children

Post by NotWhoYouThink » Mon Jan 09, 2017 10:18 am

And if said child is told from an early age that money saved is for college, chances are the child will attend a school of higher learning.


Man plans, God laughs.

Maybe they will enlist. But you just don't know when they are babies. The worst that happens with a 529 is that you have to pay a 10% penalty on the earnings if you make an nonqualified withdrawal. But with a UTMA you risk giving tens of thousands of dollars to an addict. Take whatever chances you are comfortable with. But I don't know anyone who planned to raise an addict.

Grt2bOutdoors
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Re: Investing For Children

Post by Grt2bOutdoors » Mon Jan 09, 2017 10:21 am

NotWhoYouThink wrote:
And if said child is told from an early age that money saved is for college, chances are the child will attend a school of higher learning.


Man plans, God laughs.

Maybe they will enlist. But you just don't know when they are babies. The worst that happens with a 529 is that you have to pay a 10% penalty on the earnings if you make an nonqualified withdrawal. But with a UTMA you risk giving tens of thousands of dollars to an addict. Take whatever chances you are comfortable with. But I don't know anyone who planned to raise an addict.


Depends on the state you reside in, my state doesn't permit the title to be changed until age 21, I'm using a combo of 529 and UTMA to pay for college.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Eagle4Life
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Re: Investing For Children

Post by Eagle4Life » Mon Jan 09, 2017 10:32 am

Or you could withdrawal the UTMA funds at your discretion, while "against" the law, the child won't know the difference if they don't know about the account.

NotWhoYouThink
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Re: Investing For Children

Post by NotWhoYouThink » Mon Jan 09, 2017 10:48 am

This forum generally frowns on advocating illegal activity. And if you tell them starting in pre-school that they have a savings account in their name to save for college, they'll know if you drain it, and can hire lawyers.

Most addicts, bums and dropouts live past age 21, so they'll probably be able to take possession of their money eventually.

Anyway, I recommend that parents save first for their own retirement, then for college. And use 529s for the college part.

Maybe the kids are all good as gold, but the parents have financial struggles later on. Again, you can't raid junior's UTMA to pay for Mom's cancer treatment.

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CyclingDuo
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Re: Investing For Children

Post by CyclingDuo » Mon Jan 09, 2017 11:22 am

Grt2bOutdoors wrote:Congratulations, you used "lottery tickets" to pay for college :wink: , glad it worked out for you. Don't recommend folks or OP try to emulate this strategy, purchasing undiversified, concentrated risk securities usually does not turn out so well. Recommend using a stock index investing approach instead. View the wiki for primers on the 3 Fund Portfolio and creating your own Investment Policy Statement.


Yes, we were very fortuitous. That's not to distract from the proven strategy of the 3 Fund Porfolio at all which is why we are here to continue with our learning. We had funds in mutual funds all through that time from the early 90's all the way to today in our personal accounts. However, not being familiar with the 3 Fund Strategy, or low cost ER index funds at the time as one's main investing strategy - we had a basket of stocks in our brokerage accounts.

Again, not advocating a high risk UTMA account with individual stocks as a competitive suggestion to low cost index, three fund portfolio investing at all. The OP had asked about other's experiences with UTMA/UGMA, so we responded with the journey we went through. Even as Peter Lynch said, if you get one ten bagger it makes up for a lot of other mistakes. Dell Computer, and Qualcomm were two of our fortuitous stock investments that made up for a lot of mistakes. They were not chosen at the time we purchased those shares to be a speculative investment, but rather for the growth prospects at the time. In retrospect, we can now certainly say that the speculation was rampant in the late 90's several years after we had purchased shares. We had no idea what would unfold, but certainly benefitted from some sector concentration which we put a lot of time and effort into researching, and following at the time. We would agree - it was not a hands off approach, or an invest in it and forget about it strategy. Both of our children still own shares of Qualcomm, but the Dell profits were rolled over into other investments. Again, we were very fortuitous. Yes - you are correct that the wave of speculation allowed the tide to lift a lot of boats that later sank. We were not immune to what happened in the markets from 2000 to 2008, and we are not advocating speculation as an investment strategy.

In fact, we are here to learn, adjust our strategies for the next primary goal in our lives - retirement, and passing on what we can to our children when our time clocks are up. They both have some inheritance from grandparents to invest, and we will be using the three fund approach with this new money as it makes a lot of sense to me.

That being said, back in 1993-95, we were also confronted with comments and various suggestions when we opened the UTMA accounts about there was no guarantee our children would go to college, and the money would be theirs to do with whatever they want. Drugs. Cars. Booze. We did not let those views taint our decision to open the accounts, and start adding money to those accounts to help pay for their education. For the OP, we hope they find satisfactory answers to begin setting aside some money to take advantage of the power of compounding between now and when their son reaches 18-21.

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White Coat Investor
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Re: Investing For Children

Post by White Coat Investor » Mon Jan 09, 2017 11:29 am

PecuniaryPupil23 wrote:Hello all,
First time writer, long time fan. My wife and I just recently had our first child and I am looking for any advice as far as good investment strategies for the little guy (and possibly a future sibling). My wife and I are both in the military and have the advantage if the post 911 Bill, so I don't feel like a 529 would be very useful (perhaps I'm wrong). I have read some about UGMA/UTMAs as well that sound good (any experience? Tax pitfalls?). As far as our current investments we max out our TSP and Roth IRA with the rest going into Vanguard mutual funds. Please let me know your thoughts. Thank you in advance.


For earned income, do a daddy match into a Roth IRA. Don't be afraid to have your kids get real, earned, taxable income. They won't pay taxes anyway most likely. but that does allow money to go into a Roth IRA. Technically, their money goes in, but there's no reason you can't give them an equivalent amount of your money to spend.

UGMA/UTMAs are great funds for their 20s- car, house down payment, international travel, mission work, weddings, honeymoons etc.

529s for college. If you don't get a state tax benefit and are okay only saving $2K a year, then an ESA is a good alternative.

I do all three for my kids and invest the money really aggressively. It doesn't bother them to lose some money and it doesn't bother me because it's their money! Plus, the consequences of loss are so low compared to a retirement shortfall.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Grt2bOutdoors
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Re: Investing For Children

Post by Grt2bOutdoors » Mon Jan 09, 2017 11:31 am

CyclingDuo wrote:
Grt2bOutdoors wrote:Congratulations, you used "lottery tickets" to pay for college :wink: , glad it worked out for you. Don't recommend folks or OP try to emulate this strategy, purchasing undiversified, concentrated risk securities usually does not turn out so well. Recommend using a stock index investing approach instead. View the wiki for primers on the 3 Fund Portfolio and creating your own Investment Policy Statement.


Yes, we were very fortuitous. That's not to distract from the proven strategy of the 3 Fund Porfolio at all which is why we are here to continue with our learning. We had funds in mutual funds all through that time from the early 90's all the way to today in our personal accounts. However, not being familiar with the 3 Fund Strategy, or low cost ER index funds at the time as one's main investing strategy - we had a basket of stocks in our brokerage accounts.

Again, not advocating a high risk UTMA account with individual stocks as a competitive suggestion to low cost index, three fund portfolio investing at all. The OP had asked about other's experiences with UTMA/UGMA, so we responded with the journey we went through. Even as Peter Lynch said, if you get one ten bagger it makes up for a lot of other mistakes. Dell Computer, and Qualcomm were two of our fortuitous stock investments that made up for a lot of mistakes. They were not chosen at the time we purchased those shares to be a speculative investment, but rather for the growth prospects at the time. In retrospect, we can now certainly say that the speculation was rampant in the late 90's several years after we had purchased shares. We had no idea what would unfold, but certainly benefitted from some sector concentration which we put a lot of time and effort into researching, and following at the time. We would agree - it was not a hands off approach, or an invest in it and forget about it strategy. Both of our children still own shares of Qualcomm, but the Dell profits were rolled over into other investments. Again, we were very fortuitous. Yes - you are correct that the wave of speculation allowed the tide to lift a lot of boats that later sank. We were not immune to what happened in the markets from 2000 to 2008, and we are not advocating speculation as an investment strategy.

In fact, we are here to learn, adjust our strategies for the next primary goal in our lives - retirement, and passing on what we can to our children when our time clocks are up. They both have some inheritance from grandparents to invest, and we will be using the three fund approach with this new money as it makes a lot of sense to me.

That being said, back in 1993-95, we were also confronted with comments and various suggestions when we opened the UTMA accounts about there was no guarantee our children would go to college, and the money would be theirs to do with whatever they want. Drugs. Cars. Booze. We did not let those views taint our decision to open the accounts, and start adding money to those accounts to help pay for their education. For the OP, we hope they find satisfactory answers to begin setting aside some money to take advantage of the power of compounding between now and when their son reaches 18-21.


+1. Glad to see it worked out on the children's end as well. :wink:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

gotlucky
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Re: Investing For Children

Post by gotlucky » Mon Jan 09, 2017 12:31 pm

I'm not a big fan on 529s unless you live in a state that gives you a tax deduction or credit that you can take advantage of now. When I looked at 529s many years ago, the ERs and limited choices weren't appealing. Coverdells, while limited to $2k/yr contributions, give you access to low ER ETFs. If you can only spare $2k/yr for education savings and your state doesn't offer any tax advantages, you might consider Coverdells.

That being said, if you can "only" spare $2k/yr, I'd be way more focused on my own financial independence. One of the greatest gifts that one can give to a child (after teaching them to become independent adults, of course) is not becoming a burden on them financially or expecting them to care for me above and beyond what a normal child should have to do for their parents. I'm so grateful that my parents have and probably never will need my financial help. If they (or my in-laws) ever had to move in with us or I wanted to provide extra care for them, it would strictly by choice and not because of financial need. They were able to achieve this by prioritizing their independence over "giving me a head start". So I'm going to do my best not be a burden on my kids before I start planning on their advanced education. The most important part of going to college, imo, is learning. Learning doesn't have to cost a lot of money. I'd much rather have independent, financially secure parents than a degree from some pricey, brand-name university. Also by saving the money in my coffers, I increase the likelihood that they even have the opportunity to go to college if that's what they choose.

UTMAs are good if you know how to take advantage of the tax laws by transferring appreciated stock and selling it at your kids' 0% rate. That'll could net you an extra ~$500/yr in tax savings (25% of $2100 for me in CA). The pitfalls, other than the hassle of managing yet-another brokerage account AND filing tax returns for you toddlers, have all been mentioned and are valid. Mainly it's an irrevocable gift and the funds are inflexible. Frankly, UTMAs aren't going to change the life of anyone vs keeping that money in your brokerage account. I set them up so my kids can learn about investing. And if they choose to abscond with that money when they are 18, the probably won't be getting anything from us when we die.

The bottom line: I'd keep the money in my own kitty so that I could maintain flexibility until I knew that I wasn't going to be burden for my kids. Then I'd look at getting them jobs and Roths, Coverdells, 529s and UTMAs (probably in that order).

time4life
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Re: Investing For Children

Post by time4life » Fri May 19, 2017 11:16 pm

I dont have children yet but i do have young siblings (18 years old). They hold a job but mostly receive money from relatives, family members... Are UGMA/UTMAs accounts something i can open for them or should i go with IRA/retirement accounts ?

aristotelian
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Re: Investing For Children

Post by aristotelian » Sat May 20, 2017 7:08 am

I prefer 529 for the reason stated above--I am not comfortable with an irrevocable gift when I do not know that the child will be responsible at age 18 or 21. With a 529 the money is yours with child as beneficiary if/when you decide to cut a check. (Even if they attend college, you still have to cut the check to give them the money). That is a huge distinction. It signals your generosity, but also ensures that you will get the outcome that you want while protecting against the worst case scenario.

aristotelian
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Re: Investing For Children

Post by aristotelian » Sat May 20, 2017 7:09 am

time4life wrote:I dont have children yet but i do have young siblings (18 years old). They hold a job but mostly receive money from relatives, family members... Are UGMA/UTMAs accounts something i can open for them or should i go with IRA/retirement accounts ?
If they are 18, you probably should just gift them directly under the gift tax exclusion and then help them set up their own IRA's. They will learn more from that than if you gift directly to an IRA. You can do $14K tax free to them without any IRS papers.

livesoft
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Re: Investing For Children

Post by livesoft » Sat May 20, 2017 7:18 am

time4life wrote:I dont have children yet but i do have young siblings (18 years old). They hold a job but mostly receive money from relatives, family members... Are UGMA/UTMAs accounts something i can open for them or should i go with IRA/retirement accounts ?
They are adults now and can have IRAs (for their earned income) and regular (taxable) individual accounts. I doubt one can open UGMA/UTMA accounts for them because they are too old and it is completely unnecessary and a hassle to do so. In other words, they can and should open their own accounts. They are not children anymore.
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chw
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Re: Investing For Children

Post by chw » Sat May 20, 2017 7:44 am

Congrats on your addition to the family!

There are a few ways you can go... If investing funds for the child's benefit (not education related), we invested our child's cash gifts in mutual funds more or less from their births. I also made an effort to match these gifts along the way as well. I simply opened an account in my name (earmarked for each child), and then converted these accounts to Roth IRAs in their names as they had earned income in their teens. It's a nice way to get them on firm financial footing early in their lives. We were fortunate to be able to pay for their higher education costs.

As each child got older and had the cash to invest, we discussed the benefits of investing (especially with the 100% match) versus buying things with the cash they had. We tried to use this as a lesson to not fall prey to the mass marketing hype that entraps many young people to buy unnecessary items that end up unused in a short time.

Regarding the investment itself, I would simply buy a Vangaurds Total Market index fund, and be done with it.

Other ideas regarding saving for education are already well discussed above.

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