Brokerage Account for Minor

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bgyt
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Brokerage Account for Minor

Post by bgyt » Fri Aug 10, 2018 3:31 pm

I have a 17 year old child that works part time and has saved up $4-5K and would like to invest it the BH way but also and make their first mistakes with an individual stock or two. In my state she has to be 19 to have her own account at Vanguard. Vanguard offers a Minor IRA (but can only contribute max earned in that year - not all of her savings) or an Minor account. Either account would be under my custodian account.

What is the standard advice for setting up an account in these situations. Is there any advantage in an IRA vs. regular account in this situation?

The VG rep I talked to steered me to fill out a Successor Custodian Designation form, which states "use this form to designate a successor to replace you as custodian on a Vanguard Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) account in the event of your resignation, incapacity, or death. Don’t use this form to transfer ownership of an account." :confused

I don't want to transfer money to her or ownership of the account, I just want her to invest her own money.

RIMDBogle
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Re: Brokerage Account for Minor

Post by RIMDBogle » Fri Aug 10, 2018 3:45 pm

You can check with TD Ameritrade. I did open Junior Roth IRA with them. They may have Jr. Tra, IRA as well.

Rupert
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Re: Brokerage Account for Minor

Post by Rupert » Fri Aug 10, 2018 4:03 pm

I think you'd want to prioritize Roth IRA over tIRA at her age so the money can grow tax-free for 60-70 years. You are still limited by the amount of her earned income for the year. If she has no earned income, I'd just use the regular custodial account. As for the successor custodian matter, they just want you to name someone to take over ownership of the account in the event of your death before the child reaches majority. The child's other parent might be the logical choice.

A440
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Re: Brokerage Account for Minor

Post by A440 » Fri Aug 10, 2018 4:44 pm

We opened a custodial Roth IRA for my teen at Schwab. Minimum investment was $100 and no fees other than ER. He is putting half of his summer earnings in the account (Schwab Total Stock Market) and we are matching the second half.

bgyt
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Re: Brokerage Account for Minor

Post by bgyt » Fri Aug 10, 2018 8:11 pm

Not sure I want to lock up her money until Age 59 (or at least not all of it). Is the only advantage of doing Roth vs. just a straight brokerage account as follows?...

PROS:
- No tax on earnings

CONS:
- Limited to only this years earned income account
- Can't touch it for 40+ years

fabis
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Re: Brokerage Account for Minor

Post by fabis » Fri Aug 10, 2018 8:43 pm

Pro- She has 40 years of potential growth

Spirit Rider
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Re: Brokerage Account for Minor

Post by Spirit Rider » Fri Aug 10, 2018 8:57 pm

All the money is not locked up until age 59 1/2. You can always withdraw contributions. Only the earnings are subject to qualified status.

Cop51
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Re: Brokerage Account for Minor

Post by Cop51 » Sat Aug 11, 2018 1:30 am

bgyt wrote:
Fri Aug 10, 2018 8:11 pm
Not sure I want to lock up her money until Age 59 (or at least not all of it). Is the only advantage of doing Roth vs. just a straight brokerage account as follows?...

PROS:
- No tax on earnings

CONS:
- Limited to only this years earned income account
- Can't touch it for 40+ years
She can withdraw the contributions and even take advantage of college and first time home purchase with the money with the ROTH rules and flexibility.

Grt2bOutdoors
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Re: Brokerage Account for Minor

Post by Grt2bOutdoors » Sat Aug 11, 2018 1:36 am

fabis wrote:
Fri Aug 10, 2018 8:43 pm
Pro- She has 40 years of potential growth
Con - she can’t use it to act on greater opportunities that may come her way; educational use, home purchase, car purchase. Yes, saving for retirement is important but at age 18-24 there are greater opportunities.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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celia
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Re: Brokerage Account for Minor

Post by celia » Sat Aug 11, 2018 4:29 am

bgyt wrote:
Fri Aug 10, 2018 8:11 pm
Not sure I want to lock up her money until Age 59 (or at least not all of it).
What a lot of Bogleheads do is fund the Roth for their child and let the child do what they want with their earnings. So, with your help, you can contribute to her Roth (up to the amount she earned or $5,500, whichever is lower). And you can help her use her money to start a taxable account (with adult supervision).

Don't worry about the custodian form. They just want to know who they can talk to on her behalf, should you die before she turns 19. Occasionally it happens. Then what can she do if that happens and there is no designated back-up person?

indexonlyplease
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Re: Brokerage Account for Minor

Post by indexonlyplease » Sat Aug 11, 2018 8:19 am

The child is only 17. Why not just let the child learn about saving money in a checking and savings account. When the child turns 19 and still working part time let them open their own Roth IRA and start investing the amount they want.

Waiting 2 year will not break them.


We did this with our son. When he started college and part time he opened a Roth IRA and funds it. He has been putting in the max now for 4 years.

bgyt
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Re: Brokerage Account for Minor

Post by bgyt » Sat Aug 11, 2018 8:35 am

I appreciate all the feedback. This is very helpful.

Flyer24
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Re: Brokerage Account for Minor

Post by Flyer24 » Sat Aug 11, 2018 8:42 am

Grt2bOutdoors wrote:
Sat Aug 11, 2018 1:36 am
fabis wrote:
Fri Aug 10, 2018 8:43 pm
Pro- She has 40 years of potential growth
Con - she can’t use it to act on greater opportunities that may come her way; educational use, home purchase, car purchase. Yes, saving for retirement is important but at age 18-24 there are greater opportunities.
You can use a Roth for higher education. You can also use up to 10K penalty free for a first time home purchase.

Grt2bOutdoors
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Re: Brokerage Account for Minor

Post by Grt2bOutdoors » Sat Aug 11, 2018 8:52 am

Flyer24 wrote:
Sat Aug 11, 2018 8:42 am
Grt2bOutdoors wrote:
Sat Aug 11, 2018 1:36 am
fabis wrote:
Fri Aug 10, 2018 8:43 pm
Pro- She has 40 years of potential growth
Con - she can’t use it to act on greater opportunities that may come her way; educational use, home purchase, car purchase. Yes, saving for retirement is important but at age 18-24 there are greater opportunities.
You can use a Roth for higher education. You can also use up to 10K penalty free for a first time home purchase.
Ok, come out of school at 22 to a first job and “no accessible money”, how do you propose this person get to work? Hold out the Roth IRA and hitch a ride? When you were 22, what were you thinking about besides “OMG I need to squirrel every penny away for retirement”? A taxable account provides flexibility and no one said it could not be used for retirement in a tax efficienct manner.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Flyer24
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Re: Brokerage Account for Minor

Post by Flyer24 » Sat Aug 11, 2018 9:09 am

Grt2bOutdoors wrote:
Sat Aug 11, 2018 8:52 am
Flyer24 wrote:
Sat Aug 11, 2018 8:42 am
Grt2bOutdoors wrote:
Sat Aug 11, 2018 1:36 am
fabis wrote:
Fri Aug 10, 2018 8:43 pm
Pro- She has 40 years of potential growth
Con - she can’t use it to act on greater opportunities that may come her way; educational use, home purchase, car purchase. Yes, saving for retirement is important but at age 18-24 there are greater opportunities.
You can use a Roth for higher education. You can also use up to 10K penalty free for a first time home purchase.
Ok, come out of school at 22 to a first job and “no accessible money”, how do you propose this person get to work? Hold out the Roth IRA and hitch a ride? When you were 22, what were you thinking about besides “OMG I need to squirrel every penny away for retirement”? A taxable account provides flexibility and no one said it could not be used for retirement in a tax efficienct manner.
I wasn’t making a recommendation to use a Roth instead of taxable. I was just pointing out that it could be used for those items mentioned. Personally, I think teens should just focus on having a savings and checking account.

fabis
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Re: Brokerage Account for Minor

Post by fabis » Wed Aug 15, 2018 12:46 pm

Grt2bOutdoors wrote:
Sat Aug 11, 2018 8:52 am
Flyer24 wrote:
Sat Aug 11, 2018 8:42 am
Grt2bOutdoors wrote:
Sat Aug 11, 2018 1:36 am
fabis wrote:
Fri Aug 10, 2018 8:43 pm
Pro- She has 40 years of potential growth
Con - she can’t use it to act on greater opportunities that may come her way; educational use, home purchase, car purchase. Yes, saving for retirement is important but at age 18-24 there are greater opportunities.
You can use a Roth for higher education. You can also use up to 10K penalty free for a first time home purchase.
Ok, come out of school at 22 to a first job and “no accessible money”, how do you propose this person get to work? Hold out the Roth IRA and hitch a ride? When you were 22, what were you thinking about besides “OMG I need to squirrel every penny away for retirement”? A taxable account provides flexibility and no one said it could not be used for retirement in a tax efficienct manner.
I actually wish I could be angry at money being "tied up" at that age. Some people live for the present, others for the future.

RCL
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Re: Brokerage Account for Minor

Post by RCL » Wed Aug 15, 2018 1:14 pm

Anybody calculate what $4-5K would grow to over 40 years without any other contributions?

Have read many times about how starting investments early in life make achieving financial success later in life much easier. Would think BH's would be encouraging this action.

It's not like her father is insisting his daughter do this...she wants to do this.
Also, it may only be a one time event, meaning, next year she could go about saving for other things that young people need.
It Is Best To Consult Others Before Taking Unusual Actions

A440
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Re: Brokerage Account for Minor

Post by A440 » Wed Aug 15, 2018 5:10 pm

RCL wrote:
Wed Aug 15, 2018 1:14 pm
Anybody calculate what $4-5K would grow to over 40 years without any other contributions?
I use this site when teaching my middle school kids about the power of compounding:
http://www.moneychimp.com/calculator/co ... ulator.htm

RCL
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Re: Brokerage Account for Minor

Post by RCL » Wed Aug 15, 2018 5:26 pm

A440 wrote:
Wed Aug 15, 2018 5:10 pm
RCL wrote:
Wed Aug 15, 2018 1:14 pm
Anybody calculate what $4-5K would grow to over 40 years without any other contributions?
I use this site when teaching my middle school kids about the power of compounding:
http://www.moneychimp.com/calculator/co ... ulator.htm
So, I'm too lazy to look that up.. Would you be so kind as to post the results so others can see the result?
It Is Best To Consult Others Before Taking Unusual Actions

Spirit Rider
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Re: Brokerage Account for Minor

Post by Spirit Rider » Wed Aug 15, 2018 7:56 pm

RCL wrote:
Wed Aug 15, 2018 5:26 pm
So, I'm too lazy to look that up.. Would you be so kind as to post the results so others can see the result?
No.

This is a DIY forum. The operative word is Yourself!

RCL
Posts: 306
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Re: Brokerage Account for Minor

Post by RCL » Wed Aug 15, 2018 9:22 pm

Thanks so much for your rude response; truly in the Spirirt of things :x

Since you won't provide the asked for answer, and I don't know what the correct variables are to get the correct answer, what variable should be used for Compound interest interval annually, and what would be a good value for interest rate?
It Is Best To Consult Others Before Taking Unusual Actions

Spirit Rider
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Re: Brokerage Account for Minor

Post by Spirit Rider » Thu Aug 16, 2018 1:01 am

RCL wrote:
Wed Aug 15, 2018 9:22 pm
Thanks so much for your rude response; truly in the Spirirt of things :x

Since you won't provide the asked for answer, and I don't know what the correct variables are to get the correct answer, what variable should be used for Compound interest interval annually, and what would be a good value for interest rate?
I do not consider my response rude. Quite the contrary, I feel your response to A440 was discourteous.

This is a very helpful forum, but we expect members to make some effort themselves and not expect other members to do it for them.

A440
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Location: NJ

Re: Brokerage Account for Minor

Post by A440 » Thu Aug 16, 2018 6:48 am

Here you go...

Current Principal: $ 4,500.00
Annual Addition: $ 0.00
Years to grow: 40
Interest Rate:
7.2 (Money doubles every 10 years; see rule of 72)
%
Compound interest 1 time(s) annually
Make additions at start end of each compounding period

Results
Future Value: $ 72,611.25

RCL
Posts: 306
Joined: Sat Jul 05, 2014 2:48 am

Re: Brokerage Account for Minor

Post by RCL » Thu Aug 16, 2018 11:12 am

A440 wrote:
Thu Aug 16, 2018 6:48 am
Here you go...

Current Principal: $ 4,500.00
Annual Addition: $ 0.00
Years to grow: 40
Interest Rate:
7.2 (Money doubles every 10 years; see rule of 72)
%
Compound interest 1 time(s) annually
Make additions at start end of each compounding period

Results
Future Value: $ 72,611.25
Thank you, I knew the $16k result I calculated must have been in error.

I didn't intend to be rude to anyone here, and if I was, I apologize.
But you should consider that even though a link to a tool like the calculator is given, not all people will know how to use it properly to get a viable answer.

Also my "I'm too lazy" comment was pretty much joking, but I forgot to add one of those Smilie things :oops:
It Is Best To Consult Others Before Taking Unusual Actions

RCL
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Re: Brokerage Account for Minor

Post by RCL » Thu Aug 16, 2018 11:21 am

Anyway, I think I agree with an earlier poster who recommended the minor open the account and stash the $4500 away for the future, and the parent give the same amount of $$ back to the minor. (unless this creates a tax problem) so they can have some fun at the same time
What better way to teach a youngster the ins and outs of investing?
It Is Best To Consult Others Before Taking Unusual Actions

Iridium
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Re: Brokerage Account for Minor

Post by Iridium » Fri Aug 17, 2018 12:24 am

bgyt wrote:
Fri Aug 10, 2018 3:31 pm
The VG rep I talked to steered me to fill out a Successor Custodian Designation form, which states "use this form to designate a successor to replace you as custodian on a Vanguard Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) account in the event of your resignation, incapacity, or death. Don’t use this form to transfer ownership of an account." :confused

I don't want to transfer money to her or ownership of the account, I just want her to invest her own money.
You got lots of advice on IRA vs taxable, I will try to address the second part. There are two factors at work:

1) Minors cannot sign most contracts and are frozen out of the financial system.

2) A custodian has control over assets, but does not own them. Custodians have a duty to ensure that the funds are put to the benefit of the owner.

When Vanguard offers a minor account, what they are really proposing is creating an account owned by your daughter, but with you as custodian. Since you control the account and you can invest, the account is allowed to invest, even though your daughter is not allowed to do so. At the same time, she retains ownership and would typically be able to put the account entirely under her own control without your permission by age 21 (it is state dependent).

So, what happens if you die? The money is still hers, but she is not yet allowed to control it. Having a bunch of money that nobody can control is a bad thing. To prevent that from happening, you are being encouraged to file a form that says if you can no longer be custodian, who takes control. The form emphasizes that ownership does not change (your daughter owns the account after your death, and the new custodian would have a similar duty to ensure that the funds are managed for her benefit). If she wants the money to go to someone upon HER death and you concur, then you would not file this form, but a different one. Your death would never result in a transfer of ownership, as they are not your funds to give away.

RIMDBogle
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Re: Brokerage Account for Minor

Post by RIMDBogle » Sun Aug 19, 2018 2:18 pm

Good to see this thread.

What is the typical portfolio fit into Minor Roth IRA?

Thanks for sharing.

Jablean
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Re: Brokerage Account for Minor

Post by Jablean » Sun Aug 19, 2018 2:59 pm

Iridium wrote:
Fri Aug 17, 2018 12:24 am
bgyt wrote:
Fri Aug 10, 2018 3:31 pm
The VG rep I talked to steered me to fill out a Successor Custodian Designation form, which states "use this form to designate a successor to replace you as custodian on a Vanguard Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) account in the event of your resignation, incapacity, or death. Don’t use this form to transfer ownership of an account." :confused

I don't want to transfer money to her or ownership of the account, I just want her to invest her own money.
You got lots of advice on IRA vs taxable, I will try to address the second part. There are two factors at work:

1) Minors cannot sign most contracts and are frozen out of the financial system.

2) A custodian has control over assets, but does not own them. Custodians have a duty to ensure that the funds are put to the benefit of the owner.

When Vanguard offers a minor account, what they are really proposing is creating an account owned by your daughter, but with you as custodian. Since you control the account and you can invest, the account is allowed to invest, even though your daughter is not allowed to do so. At the same time, she retains ownership and would typically be able to put the account entirely under her own control without your permission by age 21 (it is state dependent).

So, what happens if you die? The money is still hers, but she is not yet allowed to control it. Having a bunch of money that nobody can control is a bad thing. To prevent that from happening, you are being encouraged to file a form that says if you can no longer be custodian, who takes control. The form emphasizes that ownership does not change (your daughter owns the account after your death, and the new custodian would have a similar duty to ensure that the funds are managed for her benefit). If she wants the money to go to someone upon HER death and you concur, then you would not file this form, but a different one. Your death would never result in a transfer of ownership, as they are not your funds to give away.
+1 - My mother's advisor did not have her put a successor custodian on my son's UTMA she controlled. (The advisor was having a hard time getting beneficary names right in their system so not a surprise they couldn't handle UTMA succcesors) She died almost a year ago and we are still trying to get the money. It's actually easier when kids are younger but once they pass the age of 14 and are still less than 21 its much harder to get a new custodian named. If you follow the law to the letter you may have to go to court. So naming a successor custodian is a favor to your kid.

kacang
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Location: CA

Re: Brokerage Account for Minor

Post by kacang » Sun Aug 19, 2018 3:48 pm

RIMDBogle wrote:
Sun Aug 19, 2018 2:18 pm
What is the typical portfolio fit into Minor Roth IRA?


Both kids have part-time jobs while in school, and have automatic paycheck deduction into their Roths.

Kid1 thinks managing money is a pain, he decided on a target fund. Kid2 is excited about managing money, he decided on VTI and a small portion to experiment with. Currently his experiment money is in a fund that resonates with his social/political values.

It's not necessarily what I'd choose, but I'm happy with the outcome. Most importantly, they both thought through and articulated their investment philisophies. It also gave us an opportunity to help them learn about investment and the boglehead way. They can always fix any errors later.

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