What to do with gift for children

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elle
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What to do with gift for children

Post by elle »

Given covid and the lack of ability to do much of anything, my parents have been pushing me to take their extra savings ($10k) to save for my kids (3 & 6). They have specifically said they want the money earmarked for non education expenses like buying a home or a first car. Basically a kickstart in life. They originally had asked me to open a taxable account for each of them. [edit] they don’t necessarily care where it ends up, as long as it benefits the kids. I can only guess why a taxable account suggestion but they already know we are funding 529s and already gift to 529s.

I’ve tried to tell them to spend it on themselves. Save it for a rainy day. Save it for when they can vacation again. Etc. all attempts have been met with ‘no’. I’ve also asked them to invest the money for the kids and plan to give it to them or leave it in their wills. They do not want this complication in life.

Looking for advice on what to do with this money to reduce tax and financial aid impact in the long term:
(1) taxable account vti / vtsax and let it grow.
——Put it under me so as to not impact their future financial aid?
——Split the amount and put it under their respective names?
(2) put it in their 529s and fund their kickstarts out of our own funds since we will be 63 when the kids complete college.
(3) any other ideas?
Last edited by elle on Mon Sep 13, 2021 4:17 am, edited 3 times in total.
randybobandy
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Re: What to do with gift for children

Post by randybobandy »

(4) Don't accept any money as you are the parent and have made your preference known.

--Randy Bo Bandy
Grammar and spelling matter. | Quoting the OP isn't a necessity.
secondcor521
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Re: What to do with gift for children

Post by secondcor521 »

From a tax and financial aid point of view, a 529 is probably the best option, assuming you expect your kids to go to college. However, this goes against your parents' express request, so that's a relationship hurdle for you to deal with. You could probably keep it a secret from them, or maybe debate it with them, or discuss it with them, or something.

A UTMA account will be somewhat better tax-wise because the first $2200 per year (currently) would be taxed at the kids' income rates, not yours. But UTMAs are "FAFSA taxed" more since they're considered assets of the child - it's about a 50% FAFSA EFC haircut vs. a max of about 5.64% if in your name.

A taxable account in your name is the opposite - it will be a bit worse tax-wise but better FAFSA-wise.

If both your kids go to college for four years, I think the FAFSA benefit would outweigh the tax savings, but you'd have to pencil it out.

The other main idea I like in this scenario is to set aside some of the money in an accessible place (so not a 529), and then open and contribute to their Roth IRAs whatever amounts they earn in their teen years. So if they earn $1500 mowing lawns, they keep the $1500 and you put $1500 in their Roth IRA. (Depending on the exact scenario they might owe some self employment taxes, but for the amount a teenager typically earns, probably no income taxes.) They could easily graduate high school with a $10K Roth IRA and have a $30K to $50K Roth IRA when they graduate from college. It's a nice head start I think.
Arizonasun2008
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Re: What to do with gift for children

Post by Arizonasun2008 »

Have you done a FAFSA calculation before and seen what your expected family contribution (EFC) would be based on current salaries? I ran one and our EFC was high indicating to me that we would not qualify for any financial aid other than potential loans.

Similar to post above, You can set aside money in index funds and when kids get jobs, you can match their earnings up to $6k and have them put money in Roth IRA. I just opened up Roth IRAs for my nephews and even though they are not putting money aside, family members are “matching” their earnings.
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Svensk Anga
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Re: What to do with gift for children

Post by Svensk Anga »

secondcor521 wrote: Sun Sep 12, 2021 11:14 am From a tax and financial aid point of view, a 529 is probably the best option, assuming you expect your kids to go to college. However, this goes against your parents' express request, so that's a relationship hurdle for you to deal with. You could probably keep it a secret from them, or maybe debate it with them, or discuss it with them, or something.

A UTMA account will be somewhat better tax-wise because the first $2200 per year (currently) would be taxed at the kids' income rates, not yours. But UTMAs are "FAFSA taxed" more since they're considered assets of the child - it's about a 50% FAFSA EFC haircut vs. a max of about 5.64% if in your name.

A taxable account in your name is the opposite - it will be a bit worse tax-wise but better FAFSA-wise.

If both your kids go to college for four years, I think the FAFSA benefit would outweigh the tax savings, but you'd have to pencil it out.

The other main idea I like in this scenario is to set aside some of the money in an accessible place (so not a 529), and then open and contribute to their Roth IRAs whatever amounts they earn in their teen years. So if they earn $1500 mowing lawns, they keep the $1500 and you put $1500 in their Roth IRA. (Depending on the exact scenario they might owe some self employment taxes, but for the amount a teenager typically earns, probably no income taxes.) They could easily graduate high school with a $10K Roth IRA and have a $30K to $50K Roth IRA when they graduate from college. It's a nice head start I think.
I like this Roth plan. Remember that the Roth contributions can come out tax and penalty free any time. It is not just a retirement account. You might also dodge the FAFSA issue if kids are industrious or if returns are poor.

I question how much aid potential is really worth, especially given the fairly long horizon.
secondcor521
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Re: What to do with gift for children

Post by secondcor521 »

Svensk Anga wrote: Sun Sep 12, 2021 11:54 am
secondcor521 wrote: Sun Sep 12, 2021 11:14 am From a tax and financial aid point of view, a 529 is probably the best option, assuming you expect your kids to go to college. However, this goes against your parents' express request, so that's a relationship hurdle for you to deal with. You could probably keep it a secret from them, or maybe debate it with them, or discuss it with them, or something.

A UTMA account will be somewhat better tax-wise because the first $2200 per year (currently) would be taxed at the kids' income rates, not yours. But UTMAs are "FAFSA taxed" more since they're considered assets of the child - it's about a 50% FAFSA EFC haircut vs. a max of about 5.64% if in your name.

A taxable account in your name is the opposite - it will be a bit worse tax-wise but better FAFSA-wise.

If both your kids go to college for four years, I think the FAFSA benefit would outweigh the tax savings, but you'd have to pencil it out.

The other main idea I like in this scenario is to set aside some of the money in an accessible place (so not a 529), and then open and contribute to their Roth IRAs whatever amounts they earn in their teen years. So if they earn $1500 mowing lawns, they keep the $1500 and you put $1500 in their Roth IRA. (Depending on the exact scenario they might owe some self employment taxes, but for the amount a teenager typically earns, probably no income taxes.) They could easily graduate high school with a $10K Roth IRA and have a $30K to $50K Roth IRA when they graduate from college. It's a nice head start I think.
I like this Roth plan. Remember that the Roth contributions can come out tax and penalty free any time. It is not just a retirement account. You might also dodge the FAFSA issue if kids are industrious or if returns are poor.

I question how much aid potential is really worth, especially given the fairly long horizon.
And the kids' Roths are not included as child's assets for FAFSA purposes; I forgot about that until just now.

Depending on how one arranges their financial life and what happens with financial aid in the next decade or two, one could get a few thousand dollars in financial aid per kid per year. So maybe $15K total, which would likely dwarf tax savings of a UTMA. The 529 path could shelter a lot, depending on how much the grandparents gift. It's not clear from OP if it's a $10K one time gift or the first of many annual $10K gifts.
HomeStretch
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Re: What to do with gift for children

Post by HomeStretch »

If your parents want to gift your children money for non-education purposes, consider a taxable account (100% in a low-ER total stock market fund/ETF) for each child at a good low-cost brokerage with a local office such as Fidelity or Schwab.

Fidelity worked well for my children when they reached high school/college as Fidelity offers a CMA account with an ATM card and a 2% VISA card for emergency expenses. Plus the local office can handle the necessary paperwork to transfer the accounts to your children when they reach the age of majority in your state. Vanguard (which I also use) doesn’t offer any of these features/conveniences.
Mike Scott
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Re: What to do with gift for children

Post by Mike Scott »

Putting it in a 529 is the probably the easiest for tax purposes for the next several years. 529s are increasingly flexible for getting money out later and money is fungible. Putting this money in a 529 now does not mean they cannot have money later for non educational expenses.
Topic Author
elle
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Re: What to do with gift for children

Post by elle »

randybobandy wrote: Sun Sep 12, 2021 11:05 am (4) Don't accept any money as you are the parent and have made your preference known.

--Randy Bo Bandy
It’s been an ongoing conversation for many months at this point. I don’t have an issue with them giving to the kids but would prefer they spend it on themselves. My parents worked hard and we didn’t grow up with much. My spouse and I are in agreement that we will make it up to them in other ways and accept the money.
Topic Author
elle
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Re: What to do with gift for children

Post by elle »

secondcor521 wrote: Sun Sep 12, 2021 11:14 am A UTMA account will be somewhat better tax-wise because the first $2200 per year (currently) would be taxed at the kids' income rates, not yours. But UTMAs are "FAFSA taxed" more since they're considered assets of the child - it's about a 50% FAFSA EFC haircut vs. a max of about 5.64% if in your name.
The FAFSA taxed since they are considered the child’s asset is the same reason I was concerned about doing a taxable account too in their name.
secondcor521 wrote: Sun Sep 12, 2021 11:14 am The other main idea I like in this scenario is to set aside some of the money in an accessible place (so not a 529), and then open and contribute to their Roth IRAs whatever amounts they earn in their teen years. So if they earn $1500 mowing lawns, they keep the $1500 and you put $1500 in their Roth IRA. (Depending on the exact scenario they might owe some self employment taxes, but for the amount a teenager typically earns, probably no income taxes.) They could easily graduate high school with a $10K Roth IRA and have a $30K to $50K Roth IRA when they graduate from college. It's a nice head start I think.
I like this. Great idea. This is somewhat off topic, but if someone makes money babysitting or mowing lawns with cash payment… can that be eligible for Roth?
Topic Author
elle
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Re: What to do with gift for children

Post by elle »

Mike Scott wrote: Sun Sep 12, 2021 6:07 pm Putting it in a 529 is the probably the easiest for tax purposes for the next several years. 529s are increasingly flexible for getting money out later and money is fungible. Putting this money in a 529 now does not mean they cannot have money later for non educational expenses.
This is what I’m thinking. The 10% penalty doesn’t seem that bad if I transferred the funds to them after college.
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elle
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Re: What to do with gift for children

Post by elle »

secondcor521 wrote: Sun Sep 12, 2021 5:24 pm And the kids' Roths are not included as child's assets for FAFSA purposes; I forgot about that until just now.
Good to know! Didn’t know that.
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celia
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Re: What to do with gift for children

Post by celia »

You should consider if there is much chance your parents might need the money back, down the road. We had a recent thread here where grandmother gave a newlywed couple $9K and a few years later asked for it back, with interest, no less! (Grandma had done this to several relatives.) Even if your parents are not like this, is there is a chance they made need it back in the future?

I say not to put it in a tax-advantaged account, because of this.
123
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Re: What to do with gift for children

Post by 123 »

I would agree with the others that a segregated taxable account where the money is held in your name gives you the most flexibility at this point. Due to their ages investing it in VTSAX or VTI 100% likely makes the most sense. This at least gets you started with the current gift. If there are further gifts you can decide with each one how to handle it. At some point you might want to gift the funds to the children in a UTMA or their own taxable account. There is no telling how kids turn out once they go through their teenage years. You might be very surprised, positively or negatively.

Since the funds are really intended for "their future" you have a lot of discretion. You might choose to say nothing to the kids about it until the right time comes along. That might be when they need a first car, when they graduate college, when they've completed six months of full-time work, or whatever measure you decide upon. Even then you might choose not to reveal the total sum available. Sometimes these gifts from grandparents if invested wisely can turn into extraordinary sums.

These funds are entrusted to you as a fiduciary for the children's future. That future includes the children at ages 18, 21, 25, 30 and beyond. Sometimes handing a stack of money over to someone will not aid their current development and could be detrimental.
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FoolStreet
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Re: What to do with gift for children

Post by FoolStreet »

randybobandy wrote: Sun Sep 12, 2021 11:05 am (4) Don't accept any money as you are the parent and have made your preference known.

--Randy Bo Bandy
Really. Take the money to help the kids buy their first home. Bogleheads can discuss how best to accept it, but why shoot the kids in the foot. That's just mean spirited.

Having a little extra money to buy the first house is a huge blessing. Amazing. That is certainly my recommendation.

Other options, like funding annual vacations for family to get together can also be blessings.
randybobandy
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Re: What to do with gift for children

Post by randybobandy »

FoolStreet wrote: Sun Sep 12, 2021 9:01 pm
randybobandy wrote: Sun Sep 12, 2021 11:05 am (4) Don't accept any money as you are the parent and have made your preference known.

--Randy Bo Bandy
Really. Take the money to help the kids buy their first home. Bogleheads can discuss how best to accept it, but why shoot the kids in the foot. That's just mean spirited.

Having a little extra money to buy the first house is a huge blessing. Amazing. That is certainly my recommendation.

Other options, like funding annual vacations for family to get together can also be blessings.
I can't address the OP's reason for 'no' and if it is mean spirited or not. Setting boundaries is healthy, and parents get to decide what those boundaries are for their children. The OP did offer other ideas for how their kids could receive the money and they were turned down.

--Randy Bo Bandy
Grammar and spelling matter. | Quoting the OP isn't a necessity.
FoolStreet
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Re: What to do with gift for children

Post by FoolStreet »

randybobandy wrote: Sun Sep 12, 2021 9:32 pm
FoolStreet wrote: Sun Sep 12, 2021 9:01 pm
randybobandy wrote: Sun Sep 12, 2021 11:05 am (4) Don't accept any money as you are the parent and have made your preference known.

--Randy Bo Bandy
Really. Take the money to help the kids buy their first home. Bogleheads can discuss how best to accept it, but why shoot the kids in the foot. That's just mean spirited.

Having a little extra money to buy the first house is a huge blessing. Amazing. That is certainly my recommendation.

Other options, like funding annual vacations for family to get together can also be blessings.
I can't address the OP's reason for 'no' and if it is mean spirited or not. Setting boundaries is healthy, and parents get to decide what those boundaries are for their children. The OP did offer other ideas for how their kids could receive the money and they were turned down.

--Randy Bo Bandy
Ok Randy. I’m sorry and my frustration should be expressed to the original poster.
jackholloway
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Re: What to do with gift for children

Post by jackholloway »

Things do happen. Parents split up, parents have money problems, or parents decide that no child of mine is going to do *that* with their life. At the end of the day, it is up to the grandparents to decide whether they want to give some cash to your kid.

Given that, probably a UTMA is the best choice, as then both the ownership and the stewardship is clear. Since I am currently filling out college applications I really do get the desire to keep money off the FAFSA, but there are not many ways for your kid to have money that is actually theirs and for colleges not to know about it
secondcor521
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Re: What to do with gift for children

Post by secondcor521 »

elle wrote: Sun Sep 12, 2021 7:24 pm I like this. Great idea. This is somewhat off topic, but if someone makes money babysitting or mowing lawns with cash payment… can that be eligible for Roth?
Yes. It's earned income.

There are various dollar amounts at which the kid may need to file a federal income tax return - most notable is $400 in self employment income. For typical teenager amounts they probably won't have any federal income tax due. There may also be state income tax filing requirements.

It would be wise to keep records to substantiate the contribution if the IRS were to audit them. When my kids did this I just had them keep an earnings log with dates, amounts, and job ("9/1/21 $15 catsitting for Aunt Gertrude").
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elle
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Re: What to do with gift for children

Post by elle »

celia wrote: Sun Sep 12, 2021 7:29 pm You should consider if there is much chance your parents might need the money back, down the road. We had a recent thread here where grandmother gave a newlywed couple $9K and a few years later asked for it back, with interest, no less! (Grandma had done this to several relatives.) Even if your parents are not like this, is there is a chance they made need it back in the future?

I say not to put it in a tax-advantaged account, because of this.
I’m confident they won’t need it or ask for it back. Definitely a good question though as I can see how that becomes a sticky situation. If they did, I’d provide it out of my own accounts anyways. While they do not share details of their financial situation, it is their plan to leave a modest inheritance to their kids.
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elle
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Re: What to do with gift for children

Post by elle »

secondcor521 wrote: Sun Sep 12, 2021 11:21 pm
elle wrote: Sun Sep 12, 2021 7:24 pm I like this. Great idea. This is somewhat off topic, but if someone makes money babysitting or mowing lawns with cash payment… can that be eligible for Roth?
Yes. It's earned income.

There are various dollar amounts at which the kid may need to file a federal income tax return - most notable is $400 in self employment income. For typical teenager amounts they probably won't have any federal income tax due. There may also be state income tax filing requirements.

It would be wise to keep records to substantiate the contribution if the IRS were to audit them. When my kids did this I just had them keep an earnings log with dates, amounts, and job ("9/1/21 $15 catsitting for Aunt Gertrude").
Thanks!
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elle
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Re: What to do with gift for children

Post by elle »

FoolStreet wrote: Sun Sep 12, 2021 9:49 pm
randybobandy wrote: Sun Sep 12, 2021 9:32 pm
FoolStreet wrote: Sun Sep 12, 2021 9:01 pm
randybobandy wrote: Sun Sep 12, 2021 11:05 am (4) Don't accept any money as you are the parent and have made your preference known.

--Randy Bo Bandy
Really. Take the money to help the kids buy their first home. Bogleheads can discuss how best to accept it, but why shoot the kids in the foot. That's just mean spirited.

Having a little extra money to buy the first house is a huge blessing. Amazing. That is certainly my recommendation.

Other options, like funding annual vacations for family to get together can also be blessings.
I can't address the OP's reason for 'no' and if it is mean spirited or not. Setting boundaries is healthy, and parents get to decide what those boundaries are for their children. The OP did offer other ideas for how their kids could receive the money and they were turned down.

--Randy Bo Bandy
Ok Randy. I’m sorry and my frustration should be expressed to the original poster.
Well this took a dark turn! No, I’m not a parent that out of mean spirit, refused money for their children…my reason is that my parents worked hard to provide for their family. I would prefer to see them enjoy what they have earned. There is no guarantee they would be able to ‘see’ the kids enjoy this gift.

You’ll also note in my op, I did state that although I have said no, I’m looking for how best to approach investing this gift, which means I’m accepting it. After much discussion with my parents, I think they will enjoy gifting this and knowing that they can help the kids set up for a good life.
Last edited by elle on Mon Sep 13, 2021 4:14 am, edited 2 times in total.
Topic Author
elle
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Re: What to do with gift for children

Post by elle »

jackholloway wrote: Sun Sep 12, 2021 10:00 pm Things do happen. Parents split up, parents have money problems, or parents decide that no child of mine is going to do *that* with their life. At the end of the day, it is up to the grandparents to decide whether they want to give some cash to your kid.

Given that, probably a UTMA is the best choice, as then both the ownership and the stewardship is clear. Since I am currently filling out college applications I really do get the desire to keep money off the FAFSA, but there are not many ways for your kid to have money that is actually theirs and for colleges not to know about it
All great points. No one intends for life to deviate from the dream state but reality is that it does. I like the clear ownership but not loving the drag on financial aid potentially. Can’t have it all!
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elle
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Re: What to do with gift for children

Post by elle »

Thanks for all the amazing suggestions and considerations. I was left conflicted after searching old posts and you have given me a lot to think about and added clarity. Please keep them coming! This community is great!
NS_Bane
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Re: What to do with gift for children

Post by NS_Bane »

elle wrote: Sun Sep 12, 2021 7:26 pm
Mike Scott wrote: Sun Sep 12, 2021 6:07 pm Putting it in a 529 is the probably the easiest for tax purposes for the next several years. 529s are increasingly flexible for getting money out later and money is fungible. Putting this money in a 529 now does not mean they cannot have money later for non educational expenses.
This is what I’m thinking. The 10% penalty doesn’t seem that bad if I transferred the funds to them after college.
It's not just the 10% penalty. If you take out money from a 529 for non-educational expenses, the earnings will be taxed as income. If you had instead invested the money in a brokerage account, the earnings would be taxed as capital gains. Depending on your tax rates you could double the 10% penalty simply by paying income taxes on the earnings.
secondcor521
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Re: What to do with gift for children

Post by secondcor521 »

NS_Bane wrote: Mon Sep 13, 2021 5:04 am
elle wrote: Sun Sep 12, 2021 7:26 pm
Mike Scott wrote: Sun Sep 12, 2021 6:07 pm Putting it in a 529 is the probably the easiest for tax purposes for the next several years. 529s are increasingly flexible for getting money out later and money is fungible. Putting this money in a 529 now does not mean they cannot have money later for non educational expenses.
This is what I’m thinking. The 10% penalty doesn’t seem that bad if I transferred the funds to them after college.
It's not just the 10% penalty. If you take out money from a 529 for non-educational expenses, the earnings will be taxed as income. If you had instead invested the money in a brokerage account, the earnings would be taxed as capital gains. Depending on your tax rates you could double the 10% penalty simply by paying income taxes on the earnings.
It is my understanding that non-qualified withdrawals are taxed on the student's return, not the parents'. If you do the NQ withdrawals while they're still in college full time (say, senior year), any income taxes could be minimal to nonexistent.
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Kenkat
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Re: What to do with gift for children

Post by Kenkat »

A simple approach would be to purchase I Bonds in your children’s names. I never wanted to be aggressive with my kids’ gift money.
VoiceOfReason
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Re: What to do with gift for children

Post by VoiceOfReason »

elle wrote: Sun Sep 12, 2021 10:55 am Given covid and the lack of ability to do much of anything, my parents have been pushing me to take their extra savings ($10k) to save for my kids (3 & 6). They have specifically said they want the money earmarked for non education expenses like buying a home or a first car. Basically a kickstart in life.
The question becomes, do you want to respect their wishes for how the money is used? If they want it to be used for a car or home, then the options are going to be different.

- I suggest just putting it into a taxable account in your name and investing accordingly. Then when they are ready for a car - you just buy them the car and take $ from the account and reimburse yourself.
- Depending on how large the account gets, at some age around early 20ish I would advise the kids to open brokerage accounts in each of their names. Then annually transferring the money to them in the amounts up to $15k per parent per year. ($30k per year). Until all of it is transferred over to them.

I like the IRA avenue too, but that does not respect their wishes for how the $ is used.
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Re: What to do with gift for children

Post by nycbudgetq »

I was fortunate enough to receive some gifts from grandparents when I was young. My folks put it into UTMA accounts for us. That has been very helpful and powerful for my siblings and I, since the money was clearly ours and its use was flexible. We all paid some tuition out of it, but also used it for other living expenses like a car, rent during certain periods of time, etc.

I think legally transferring it to the child sends the right message about whose money it is, and lets them feel like it's actually theirs. In the long run it can be a powerful tool for helping them mature financially.

(I also like the Roth "matching" idea, or even Roth Reshuffling from UTMA -> Roth on any income they receive).

Yes, it may be treated "poorly" by FAFSA, but since there are many factors (parental income and assets especially), I'd want to be pretty confident characterizing $10k-$30k as "theirs" vs "parents" would materially impact the FAFSA estimate. I calculated some rough numbers based on a typicalish bogglehead dual income HCOL household, and found that with my random numbers shifting $10k in investment from student to parent changed EFC from $81,036 to $79,350. Not nothing, but at those EFCs I think you won't be eligible for that much good aid anyway, so what's the difference?
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elle
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Re: What to do with gift for children

Post by elle »

nycbudgetq wrote: Mon Sep 13, 2021 1:50 pm I was fortunate enough to receive some gifts from grandparents when I was young. My folks put it into UTMA accounts for us. That has been very helpful and powerful for my siblings and I, since the money was clearly ours and its use was flexible. We all paid some tuition out of it, but also used it for other living expenses like a car, rent during certain periods of time, etc.

I think legally transferring it to the child sends the right message about whose money it is, and lets them feel like it's actually theirs. In the long run it can be a powerful tool for helping them mature financially.

(I also like the Roth "matching" idea, or even Roth Reshuffling from UTMA -> Roth on any income they receive).

Yes, it may be treated "poorly" by FAFSA, but since there are many factors (parental income and assets especially), I'd want to be pretty confident characterizing $10k-$30k as "theirs" vs "parents" would materially impact the FAFSA estimate. I calculated some rough numbers based on a typicalish bogglehead dual income HCOL household, and found that with my random numbers shifting $10k in investment from student to parent changed EFC from $81,036 to $79,350. Not nothing, but at those EFCs I think you won't be eligible for that much good aid anyway, so what's the difference?
Good point. Honestly I don’t think we would get financial aid at our current income level. We both work in big tech and the potential for a forced retirement at age 50 always worries me. I’ve seen too many instances where great individuals were laid off, particularly my husband’s company that does an annual clearing.
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