FZROX for Grandchildren?

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cat5
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FZROX for Grandchildren?

Post by cat5 »

Hello Forum,

I am interested in opening FZROX in a taxable account at Fidelity for each of my grandchildren in hopes that they may get interested in investing. . The account will be in my name, Are there any others doing something like this? I am presently invested in Vanguard funds only, but chose FZROX over VTI because of its share price, something a child may be motivated to invest in.

Cat5
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retired@50
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Re: FZROX for Grandchildren?

Post by retired@50 »

cat5 wrote: Wed May 11, 2022 9:57 am Hello Forum,

I am interested in opening FZROX in a taxable account at Fidelity for each of my grandchildren in hopes that they may get interested in investing. . The account will be in my name, Are there any others doing something like this? I am presently invested in Vanguard funds only, but chose FZROX over VTI because of its share price, something a child may be motivated to invest in.

Cat5
The plan to use FZROX over VTI in a taxable account suffers from two issues.

1. FZROX is unique to Fidelity, so if you or the grand kids ever want to move it to another broker, they will be forced to sell and recognize any gains before switching to another custodian.

2. FZROX is not as tax-efficient as VTI. FZROX occasionally declares capital gains distributions which are taxable income to the account holder even if no shares are sold. Over a long time frame (like I suspect you have in mind) these costs will add up.

I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI.

Regards,
This is one person's opinion. Nothing more.
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vineviz
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Re: FZROX for Grandchildren?

Post by vineviz »

cat5 wrote: Wed May 11, 2022 9:57 am Hello Forum,

I am interested in opening FZROX in a taxable account at Fidelity for each of my grandchildren in hopes that they may get interested in investing. . The account will be in my name, Are there any others doing something like this? I am presently invested in Vanguard funds only, but chose FZROX over VTI because of its share price, something a child may be motivated to invest in.

Cat5
You're about to read a lot of replies telling you to NEVER put FZROX in a taxable account.

Please heed them all.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
audioengr
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Re: FZROX for Grandchildren?

Post by audioengr »

Or you could stick with Fidelity and every year, sell the FZROX, then buy it back. Selling for gain, then rebuying is allowed, just incurs tax.
This would count towards their tax liability, likely to be little/none for several years.
This Tax Gain Harvesting would allow you to increase their basis cost, decreasing their tax liability when they're older.

Unless you're expecting to invest large amounts of money into accounts, their tax liability is likely a non-issue (for now).

Agree on FZROX, that is what we're using for our Nephews. The smaller cost per share makes buying easier to visualize.
FZROX (as of May 11): $13.92/share
VTI (as of May 11, 11:24AM EST): $199.96/share

https://www.irs.gov/taxtopics/tc553
https://www.schwab.com/resource-center/ ... harvesting
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vineviz
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Re: FZROX for Grandchildren?

Post by vineviz »

retired@50 wrote: Wed May 11, 2022 10:13 am I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI.
Another reason to ignore the share price issue is that Fidelity allows customers to transact in fractional shares.

Want to buy $25 of VTI? Done.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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retired@50
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Re: FZROX for Grandchildren?

Post by retired@50 »

audioengr wrote: Wed May 11, 2022 10:29 am Or you could stick with Fidelity and every year, sell the FZROX, then buy it back. Selling for gain, then rebuying is allowed, just incurs tax.
This would count towards their tax liability, likely to be little/none for several years.
This Tax Gain Harvesting would allow you to increase their basis cost, decreasing their tax liability when they're older.
It seems you may have overlooked this statement by the OP.
cat5 wrote: Wed May 11, 2022 9:57 am The account will be in my name
I think this derails the idea you've presented above.

Regards,
This is one person's opinion. Nothing more.
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retired@50
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Re: FZROX for Grandchildren?

Post by retired@50 »

vineviz wrote: Wed May 11, 2022 10:31 am
retired@50 wrote: Wed May 11, 2022 10:13 am I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI.
Another reason to ignore the share price issue is that Fidelity allows customers to transact in fractional shares.

Want to buy $25 of VTI? Done.
Good tip.

Regards,
This is one person's opinion. Nothing more.
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galawdawg
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Re: FZROX for Grandchildren?

Post by galawdawg »

Just two observations. First, as others noted, FZROX is a proprietary Fidelity fund and cannot be transferred in-kind to any other brokerage. That locks you, and anyone you gift the shares to, into Fidelity unless the shares are sold and any capital gains taxes are paid.

Second, if your objective is getting your grandchildren interested in investing, putting the account in your name may not have the desired impact. Seeing that grandpa has some investments that are growing (hopefully) is not going to interest them. However, seeing that they have some investments that are growing (hopefully) in an account in their name to which they can add funds (allowances, gifts, lawn mowing money, etc) to invest if they desire would be much more effective. Just set the account up as a custodial account. https://www.fidelity.com/open-account/custodial-account
audioengr
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Re: FZROX for Grandchildren?

Post by audioengr »

retired@50 wrote: Wed May 11, 2022 10:33 am
audioengr wrote: Wed May 11, 2022 10:29 am Or you could stick with Fidelity and every year, sell the FZROX, then buy it back. Selling for gain, then rebuying is allowed, just incurs tax.
This would count towards their tax liability, likely to be little/none for several years.
This Tax Gain Harvesting would allow you to increase their basis cost, decreasing their tax liability when they're older.
It seems you may have overlooked this statement by the OP.
cat5 wrote: Wed May 11, 2022 9:57 am The account will be in my name
I think this derails the idea you've presented above.

Regards,
I did overlook that. I assumed (my mistake) that the OP meant Custodial Accounts.
That likely derails the Tax Harvesting idea.
Broken Man 1999
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Re: FZROX for Grandchildren?

Post by Broken Man 1999 »

Definitely use a minor account, or at least a POD beneficiary; as a grandpa, you won't be around forever.

Sometimes the intent of the giver isn't respected by those left behind, as voiced in various discussions here at BH.

I totally trust my DW and DDs, but IMHO if one is considering leaving an inheritance to someone, it seems the best way to accomplish the goal would be having no one in the middle being necessary for the inheritance to be received.

Broken Man 1999
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MrCheapo
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Re: FZROX for Grandchildren?

Post by MrCheapo »

@retired@50

Does what you say hold also for the mutual fund version of VTI, VTSAX? I have a non-brokerage account with Vanguard so can't buy VTI.
retired@50 wrote: Wed May 11, 2022 10:13 am
cat5 wrote: Wed May 11, 2022 9:57 am Hello Forum,

I am interested in opening FZROX in a taxable account at Fidelity for each of my grandchildren in hopes that they may get interested in investing. . The account will be in my name, Are there any others doing something like this? I am presently invested in Vanguard funds only, but chose FZROX over VTI because of its share price, something a child may be motivated to invest in.

Cat5
The plan to use FZROX over VTI in a taxable account suffers from two issues.

1. FZROX is unique to Fidelity, so if you or the grand kids ever want to move it to another broker, they will be forced to sell and recognize any gains before switching to another custodian.

2. FZROX is not as tax-efficient as VTI. FZROX occasionally declares capital gains distributions which are taxable income to the account holder even if no shares are sold. Over a long time frame (like I suspect you have in mind) these costs will add up.

I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI.

Regards,
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Re: FZROX for Grandchildren?

Post by retired@50 »

MrCheapo wrote: Wed May 11, 2022 12:17 pm @retired@50

Does what you say hold also for the mutual fund version of VTI, VTSAX? I have a non-brokerage account with Vanguard so can't buy VTI.
retired@50 wrote: Wed May 11, 2022 10:13 am
cat5 wrote: Wed May 11, 2022 9:57 am Hello Forum,

I am interested in opening FZROX in a taxable account at Fidelity for each of my grandchildren in hopes that they may get interested in investing. . The account will be in my name, Are there any others doing something like this? I am presently invested in Vanguard funds only, but chose FZROX over VTI because of its share price, something a child may be motivated to invest in.

Cat5
The plan to use FZROX over VTI in a taxable account suffers from two issues.

1. FZROX is unique to Fidelity, so if you or the grand kids ever want to move it to another broker, they will be forced to sell and recognize any gains before switching to another custodian.

2. FZROX is not as tax-efficient as VTI. FZROX occasionally declares capital gains distributions which are taxable income to the account holder even if no shares are sold. Over a long time frame (like I suspect you have in mind) these costs will add up.

I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI.

Regards,
Yes. See above in red.

Regards,
This is one person's opinion. Nothing more.
mega317
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Re: FZROX for Grandchildren?

Post by mega317 »

How old are these kids? Kids have priorities that don't usually include retirement, home ownership, or even necessarily next week. They want cars and school trips and clothes and acne treatments and maybe tutors and test prep, multi week college tours, whatever. "Investing" in any sense that is appropriate for stocks may be a tall order.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
h82goslw
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Re: FZROX for Grandchildren?

Post by h82goslw »

retired@50 wrote: Wed May 11, 2022 12:26 pm
MrCheapo wrote: Wed May 11, 2022 12:17 pm @retired@50

Does what you say hold also for the mutual fund version of VTI, VTSAX? I have a non-brokerage account with Vanguard so can't buy VTI.
retired@50 wrote: Wed May 11, 2022 10:13 am
cat5 wrote: Wed May 11, 2022 9:57 am Hello Forum,

I am interested in opening FZROX in a taxable account at Fidelity for each of my grandchildren in hopes that they may get interested in investing. . The account will be in my name, Are there any others doing something like this? I am presently invested in Vanguard funds only, but chose FZROX over VTI because of its share price, something a child may be motivated to invest in.

Cat5
The plan to use FZROX over VTI in a taxable account suffers from two issues.

1. FZROX is unique to Fidelity, so if you or the grand kids ever want to move it to another broker, they will be forced to sell and recognize any gains before switching to another custodian.

2. FZROX is not as tax-efficient as VTI. FZROX occasionally declares capital gains distributions which are taxable income to the account holder even if no shares are sold. Over a long time frame (like I suspect you have in mind) these costs will add up.

I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI.

Regards,
Yes. See above in red.

Regards,
Ok now I have to chime in (apologies to OP for derailing thread).
I thought mutual funds were inherently less tax efficient than ETFs. I’ve learned much from retired@50’s many posts so I had to pose the question.
rkhusky
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Re: FZROX for Grandchildren?

Post by rkhusky »

h82goslw wrote: Wed May 11, 2022 6:24 pm I thought mutual funds were inherently less tax efficient than ETFs.
Vanguard has a patent that makes the ETF a share class of the mutual fund, so they are equally tax efficient. But only at Vanguard, for now - the patent is due to expire in the near future.
exodusNH
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Re: FZROX for Grandchildren?

Post by exodusNH »

h82goslw wrote: Wed May 11, 2022 6:24 pm
retired@50 wrote: Wed May 11, 2022 12:26 pm
MrCheapo wrote: Wed May 11, 2022 12:17 pm @retired@50

Does what you say hold also for the mutual fund version of VTI, VTSAX? I have a non-brokerage account with Vanguard so can't buy VTI.
retired@50 wrote: Wed May 11, 2022 10:13 am
cat5 wrote: Wed May 11, 2022 9:57 am Hello Forum,

I am interested in opening FZROX in a taxable account at Fidelity for each of my grandchildren in hopes that they may get interested in investing. . The account will be in my name, Are there any others doing something like this? I am presently invested in Vanguard funds only, but chose FZROX over VTI because of its share price, something a child may be motivated to invest in.

Cat5
The plan to use FZROX over VTI in a taxable account suffers from two issues.

1. FZROX is unique to Fidelity, so if you or the grand kids ever want to move it to another broker, they will be forced to sell and recognize any gains before switching to another custodian.

2. FZROX is not as tax-efficient as VTI. FZROX occasionally declares capital gains distributions which are taxable income to the account holder even if no shares are sold. Over a long time frame (like I suspect you have in mind) these costs will add up.

I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI.

Regards,
Yes. See above in red.

Regards,
Ok now I have to chime in (apologies to OP for derailing thread).
I thought mutual funds were inherently less tax efficient than ETFs. I’ve learned much from retired@50’s many posts so I had to pose the question.
Because VTI is a share class of VTSAX, the latter benefits from the tax efficiency of VTI. It's a patented structure that Vanguard has exclusive rights to until sometime next year.
h82goslw
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Re: FZROX for Grandchildren?

Post by h82goslw »

Somehow I knew this but didn’t make the connection as to why.
Thank you both for explaining.
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Brianmcg321
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Re: FZROX for Grandchildren?

Post by Brianmcg321 »

Don’t put FZORX in a taxable.

Share price in mutual funds is irrelevant.
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retired@50
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Re: FZROX for Grandchildren?

Post by retired@50 »

h82goslw wrote: Wed May 11, 2022 7:13 pm I’ve learned much from retired@50’s many posts so I had to pose the question. <- Thanks for this... :happy

Somehow I knew this but didn’t make the connection as to why.
Thank you both for explaining.
Since rkhusky and exodusNH have already explained, Vanguard patent, share class, etc. so now you know too.

I was busy napping.

Regards,
This is one person's opinion. Nothing more.
MrCheapo
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Re: FZROX for Grandchildren?

Post by MrCheapo »

rkhusky wrote: Wed May 11, 2022 6:38 pm
h82goslw wrote: Wed May 11, 2022 6:24 pm I thought mutual funds were inherently less tax efficient than ETFs.
Vanguard has a patent that makes the ETF a share class of the mutual fund, so they are equally tax efficient. But only at Vanguard, for now - the patent is due to expire in the near future.
Down stream it says the patent expires in a year. So what happens after that? Vanguard can keep doing it and others?
exodusNH
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Re: FZROX for Grandchildren?

Post by exodusNH »

MrCheapo wrote: Wed May 11, 2022 9:50 pm
rkhusky wrote: Wed May 11, 2022 6:38 pm
h82goslw wrote: Wed May 11, 2022 6:24 pm I thought mutual funds were inherently less tax efficient than ETFs.
Vanguard has a patent that makes the ETF a share class of the mutual fund, so they are equally tax efficient. But only at Vanguard, for now - the patent is due to expire in the near future.
Down stream it says the patent expires in a year. So what happens after that? Vanguard can keep doing it and others?
Anyone can do it, but it needs regulatory approval. It not guaranteed that they'd be allowed to do it. There was an article that must have been linked from here that discussed it more.

Apparently Vanguard did license the patent to one or two companies, though they didn't implement it.

With the normalization of ETFs nowadays, it's not clear that there'd be a lot of demand for it. 17 years is a long time.
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cat5
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Re: FZROX for Grandchildren?

Post by cat5 »

THANK YOU, EVERYONE for the valuable information you provided. I appreciate your long range viewpoints.
I have a POD on every account. The Kids have show a lot of responsibility wrt their $, but who knows when hormones kick in..

Some comments:

" FZROX is not as tax-efficient as VTI. FZROX occasionally declares capital gains distributions which are taxable income to the account holder even if no shares are sold. Over a long time frame (like I suspect you have in mind) these costs will add up."

I hadn't expected random capital gains: I am spoiled by VTI/VTSAX.

"I'd ignore the share price issue and use an ETF (like VTI) if you intend to invest this money at Fidelity. Otherwise, you could open an account at Vanguard and use the VTSAX mutual fund - which is just as tax efficient as VTI."

I don't particularly want to use Fidelity. I like having one brokerage. I already have a legacy account for my daughter, but thought it would be good for the kids to get involved since they show interest now.


" Sometimes the intent of the giver isn't respected by those left behind, as voiced in various discussions here at BH."

I totally understand that. Happens a lot.

"How old are these kids? Investing" in any sense that is appropriate for stocks may be a tall order"
9 and 11. They both show interest now, though it is not their main focus in life.


"Or you could stick with Fidelity and every year, sell the FZROX, then buy it back. Selling for gain, then rebuying is allowed, just incurs tax.
This would count towards their tax liability, likely to be little/none for several years.
This Tax Gain Harvesting would allow you to increase their basis cost, decreasing their tax liability when they're older."

Interesting. Maybe , if I open a custodial account. Will think about it.

"Another reason to ignore the share price issue is that Fidelity allows customers to transact in fractional shares"

I thought that was one of the detractions of buying and ETF and a benefit of buying a mutual fund I may have missed something.


"Don’t put FZORX in a taxable. Share price in mutual funds is irrelevant."
Plain and simple. appreciate it.

"Just set the account up as a custodial account."
Will look into it.

Lastly, I am not sure about the tax efficiency of VTI/VTSAX. Does this mean down the line, VTSAX may become less tax efficient? Lots of people will be disappointed and upset, I am sure.

Thank you everyone for all your "food for thought".I wish I had something bright and insightful to say about investing. All I can say is I find it challenging.

c5
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