Children's Savings

[Lexclone]

Best, pretty much risk free investment would be to take the kid's savings and paydown your mortgage. Say your kid had a $1K, then make a $1K principle pymt on your mortgage. If your mortgage is at 2.5% then your kid will earn at 2.5% compounded monthly...and it's after income tax.

I disagree with this. Studies (see Wharton School’s Prof Jeremy Siegel’s book - Stocks for the Long Run) show that over a long period, it is better to borrow at a low, tax-advantaged rate and invest in a diversified, low expense mutual fund (or ETF). In this case the low rates on mortgages and the deduction for mortgage interest make what you suggested, exactly the opposite of what most people should do.

 

[cyfan92]

Sounds like a custodial broker account is coming up often. Who's the best provider?

 

[Mtowncyclone13]

Am I over thinking this... but park money in a 529 plan and open up a normal brokerage account at a place like Vanguard (zero commissions). That way you control the account now and in the future, and if you wanna give money to your kids do it then.

 

[Tailg8er]

Find a local investment advisor that you can trust and verify his or her reputation.

Buy some ETFs or mutual funds that have moderate risk and invest for the long haul.

Your second sentence sounds like solid enough advice, why would you also suggest a financial advisor? (Serious question)

There seems to be plenty of advice and research options online - assuming you can decide how much risk you're comfortable with, I don't really understand why you should pay a percentage of your money to someone else.

 

[cycloneML]

We have a very young child and are planning on having more. We are very fortunate to have good incomes, live well below those incomes and can in turn save for the future.

My question is there any tools out there, outside of fully funding a 529 to let money grow more than 0.1% in a money market account? No where close to having enough for trust funds..

UGMA or UTMA accounts

 

[Cyclone06]

I disagree with this. Studies (see Wharton School’s Prof Jeremy Siegel’s book - Stocks for the Long Run) show that over a long period, it is better to borrow at a low, tax-advantaged rate and invest in a diversified, low expense mutual fund (or ETF). In this case the low rates on mortgages and the deduction for mortgage interest make what you suggested, exactly the opposite of what most people should do.

The theory is sound but man do I value peace of mind and the significant reduction of risk.

 

[Legothug]

529 plans will give you tax advantages. I think the limit in 2020 was 24k per child, so maxing it is extremely difficult for most folks. In order to get your state tax breaks, you have to ensure you're using your state's sponsored 529 plan. Iowa's is Vanguard. If the money is used for school, it's tax and penalty free. If it's used for anything else, it's taxed and penalized. The nice thing is that you can transfer the beneficiary though. If kid A decides they want to do community college you can spend what you need there and then transfer the balance to another eligible beneficiary. The new beneficiary has to be related in some manner, I think they let you go out to a first cousin at this point. The most important piece is that you own the account and the monies. If you want to close it up, feel free, but you'll pay taxes on it.

Someone mentioned UGMA/UTMA, your child will own this money from the day it's deposited. There is no transfer of ownership other than when the beneficiary has reached the age of majority (dependent on what state you're living in, usually 18 or 21) then the beneficiary takes controlling ownership of the account. If little Johnny wants to take his money and hit the Vegas strip, that's his call and he's eligible to do so, you can't say squat about it. There are no strings to how the money is used. There are also no tax advantages. Beneficiary will pay long or short term gains on any earnings, you don't get a tax write off anywhere down the line.

Those are the two I know most about so that's where I'll stop weighing in.

 

[Bestaluckcy]

Another risk free option is to purchase I bonds. Government bonds designed to keep up with inflation. Interest rate changes every 6 months to reflect the current inflation rate, rate will not go below 0%. Required to keep your purchase for 12 months before they can be cashed. Forfeiture of 3 months interest unless kept longer than 5 years. I think the present rate is 3.47%. Limited to $10,000 per individual per year. To purchase open an account via Treasury Direct. (Not difficult).

 

[CycloneDaddy]

529 plans will give you tax advantages. I think the limit in 2020 was 24k per child, so maxing it is extremely difficult for most folks. In order to get your state tax breaks, you have to ensure you're using your state's sponsored 529 plan. Iowa's is Vanguard. If the money is used for school, it's tax and penalty free. If it's used for anything else, it's taxed and penalized. The nice thing is that you can transfer the beneficiary though. If kid A decides they want to do community college you can spend what you need there and then transfer the balance to another eligible beneficiary. The new beneficiary has to be related in some manner, I think they let you go out to a first cousin at this point. The most important piece is that you own the account and the monies. If you want to close it up, feel free, but you'll pay taxes on it.

Someone mentioned UGMA/UTMA, your child will own this money from the day it's deposited. There is no transfer of ownership other than when the beneficiary has reached the age of majority (dependent on what state you're living in, usually 18 or 21) then the beneficiary takes controlling ownership of the account. If little Johnny wants to take his money and hit the Vegas strip, that's his call and he's eligible to do so, you can't say squat about it. There are no strings to how the money is used. There are also no tax advantages. Beneficiary will pay long or short term gains on any earnings, you don't get a tax write off anywhere down the line.

Those are the two I know most about so that's where I'll stop weighing in.

Iowa 529 is like $3400 per kid per parent to max the tax advantage. Wife and I max for 2 kids and saves us about $800 per year in Iowa taxes.

 

[MisterO]

Savings is good, but a good money education is important too. Dave Ramsey has some great resources to help teach kids about financial responsibility and to teach parents how to teach their kids good financial practices.
A good financial education is just as important as a good formal education in my opinion. Good for you for planning so far ahead for your kids- I pray you and your family continues to be blessed!

 

[BCClone]

Go on a nice vacation and while there, tell your kids you could have put the cost of the vacation in a college fund for them but chose to blow it instead. So they best get a job now if they want to go to college.

 

[NATEizKING]

Is there an income limit on a 529? Not that I will reach it but curious - that's what I have for our 3 kids.

 

[Bestaluckcy]

Go on a nice vacation and while there, tell your kids you could have put the cost of the vacation in a college fund for them but chose to blow it instead. So they best get a job now if they want to go to college.

That’s what my brother in law did. Also bought an expensive boat to help with the vacation.

 

[Mr.G.Spot]

Your second sentence sounds like solid enough advice, why would you also suggest a financial advisor? (Serious question)

There seems to be plenty of advice and research options online - assuming you can decide how much risk you're comfortable with, I don't really understand why you should pay a percentage of your money to someone else.

You absolutely can do by yourself. I choose not to because I want their (independent advisor) research material. I do my own and the firm does their own. Then I make final decisions. Over kill - maybe, but I get access to funds that I would never find on my own.

 

[CycloneDaddy]

Is there an income limit on a 529? Not that I will reach it but curious - that's what I have for our 3 kids.

As far as I know there is not.

 

[ISUCHIEF]

529 plans will give you tax advantages. I think the limit in 2020 was 24k per child, so maxing it is extremely difficult for most folks. In order to get your state tax breaks, you have to ensure you're using your state's sponsored 529 plan. Iowa's is Vanguard. If the money is used for school, it's tax and penalty free. If it's used for anything else, it's taxed and penalized. The nice thing is that you can transfer the beneficiary though. If kid A decides they want to do community college you can spend what you need there and then transfer the balance to another eligible beneficiary. The new beneficiary has to be related in some manner, I think they let you go out to a first cousin at this point. The most important piece is that you own the account and the monies. If you want to close it up, feel free, but you'll pay taxes on it.

Someone mentioned UGMA/UTMA, your child will own this money from the day it's deposited. There is no transfer of ownership other than when the beneficiary has reached the age of majority (dependent on what state you're living in, usually 18 or 21) then the beneficiary takes controlling ownership of the account. If little Johnny wants to take his money and hit the Vegas strip, that's his call and he's eligible to do so, you can't say squat about it. There are no strings to how the money is used. There are also no tax advantages. Beneficiary will pay long or short term gains on any earnings, you don't get a tax write off anywhere down the line.

Those are the two I know most about so that's where I'll stop weighing in.

I am looking to open a 529 for our first kid who is due later this fall. My question is related to you mentioning that you need to use the Iowa 529 in order to get state of Iowa tax breaks? Is that true? We already use Schwab for some other stuff, and I noticed they also have a 529. The Schwab website states “tax advantages” as part of their account benefits. Is this different than the Iowa 529 through Vanguard? I like Vanguard as a company just fine, but I think I’d like a consolidated financial hub more if that makes sense too… we already have brokerage, checking, and savings there.

 

[CycloneDaddy]

I am looking to open a 529 for our first kid who is due later this fall. My question is related to you mentioning that you need to use the Iowa 529 in order to get state of Iowa tax breaks? Is that true? We already use Schwab for some other stuff, and I noticed they also have a 529. The Schwab website states “tax advantages” as part of their account benefits. Is this different than the Iowa 529 through Vanguard? I like Vanguard as a company just fine, but I think I’d like a consolidated financial hub more if that makes sense too… we already have brokerage, checking, and savings there.

U can only get the iowa tax advantage by using the state 529 plan (college savings Iowa).

 

[BCClone]

I am looking to open a 529 for our first kid who is due later this fall. My question is related to you mentioning that you need to use the Iowa 529 in order to get state of Iowa tax breaks? Is that true? We already use Schwab for some other stuff, and I noticed they also have a 529. The Schwab website states “tax advantages” as part of their account benefits. Is this different than the Iowa 529 through Vanguard? I like Vanguard as a company just fine, but I think I’d like a consolidated financial hub more if that makes sense too… we already have brokerage, checking, and savings there.

You get tax advantages with non Iowa 529 by being tax free earnings. So there are tax savings there. If you want to save income taxes then you must go through the Iowa set up. You and your spouse can drop in around 3400 each (separate accounts though) and save state income taxes on about 6800.