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Best Option for Children's Savings
Old 12-30-2011, 11:54 AM   #1
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Best Option for Children's Savings

What are the best options for Children's savings? My oldest son (age 6) has about $1,000 saved up. Right now it is currently in a low-interest savings account.

What are the best recommendations for where to place his money for the long-term until he is 18 years old at the earliest? I will want to make sure additional money is contributed throughout the rest of his childhood as well.

Perhaps more information is needed
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Old 12-30-2011, 12:15 PM   #2
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If rates were better I'd suggest a CD ladder, but they suck so I'd buy I-bonds or if you want to roll the dice some more a balanced fund like Wellesley or Wellington.
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Old 12-30-2011, 12:18 PM   #3
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If rates were better I'd suggest a CD ladder, but they suck so I'd buy I-bonds or if you want to roll the dice some more a balanced fund like Wellesley or Wellington.
Stupid question, but how does this work when investing children's funds? I am essentially opening an a separate account in my name and investing their funds that way? How does it work when filing taxes and such?
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Old 12-30-2011, 12:39 PM   #4
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Stupid question, but how does this work when investing children's funds? I am essentially opening an a separate account in my name and investing their funds that way? How does it work when filing taxes and such?
If it's in your name it's your tax burden. Even in the kid's name it could quickly be taxed at your rate anyway, though you will save some taxes. I never bothered with separate accounts, just kept budget entries, with the added benefit that I had full control of the money even after they reached 18. Otherwise it's their money at 18.

An online savings account might be good to start, with a higher interest rate. If it gets into big money I'd invest it in a conservative balanced fund and start moving to cash a few years before it's required.
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Old 12-30-2011, 03:21 PM   #5
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Perhaps more information is needed
Perhaps it is. I recommend a library copy of David Owen:
http://www.amazon.com/First-National...5278725&sr=1-1

Kids think that parents are psychotic about money because the parents want to take it away from them and lock it up "forever". So the most rational thing a kid can do is spend it as quickly as possible before it's confiscated. [Insert flawed analogies to taxpayers and governments here.]

Maybe you could have a conversation with your kid about what they'd want to do with "their" money. They could put some of it aside for a new toy, maybe give some to charity, maybe invest some in a "Bank of Dad" CD or shares of stock.

$1000 might be near the minimum deposit for opening a Roth IRA account. Of course it'd have to be declared as the kid's earned income, which might be subject to IRS scrutiny at this age. But when you get around to opening an IRA for a minor, T. Rowe Price was about the only fund company we could find that would subcustody to that demographic. Our kid switched from there to Fidelity as soon as she turned age 18.
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Old 12-31-2011, 08:07 PM   #6
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If it's in your name it's your tax burden. Even in the kid's name it could quickly be taxed at your rate anyway, though you will save some taxes. I never bothered with separate accounts, just kept budget entries, with the added benefit that I had full control of the money even after they reached 18. Otherwise it's their money at 18.

An online savings account might be good to start, with a higher interest rate. If it gets into big money I'd invest it in a conservative balanced fund and start moving to cash a few years before it's required.


So you lump their money in with yours and keep track of it in a journal of some sort?
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Old 12-31-2011, 08:14 PM   #7
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Perhaps it is. I recommend a library copy of David Owen:
http://www.amazon.com/First-National...5278725&sr=1-1

Kids think that parents are psychotic about money because the parents want to take it away from them and lock it up "forever". So the most rational thing a kid can do is spend it as quickly as possible before it's confiscated. [Insert flawed analogies to taxpayers and governments here.]

Maybe you could have a conversation with your kid about what they'd want to do with "their" money. They could put some of it aside for a new toy, maybe give some to charity, maybe invest some in a "Bank of Dad" CD or shares of stock.

$1000 might be near the minimum deposit for opening a Roth IRA account. Of course it'd have to be declared as the kid's earned income, which might be subject to IRS scrutiny at this age. But when you get around to opening an IRA for a minor, T. Rowe Price was about the only fund company we could find that would subcustody to that demographic. Our kid switched from there to Fidelity as soon as she turned age 18.
Even if it is subject to IRS scrutiny/taxes, aren't the possible returns much higher than say a CD or savings account?
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Old 12-31-2011, 08:45 PM   #8
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So you lump their money in with yours and keep track of it in a journal of some sort?
Yep, they each have an account in our Quicken budget. We paid some interest on the balance each month to encourage saving. College money is in the retirement accounts with no tracking other than part of the retirement plan.

We did separate things when they hit 18 and wanted to start investing their savings.
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Old 12-31-2011, 10:35 PM   #9
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Even if it is subject to IRS scrutiny/taxes, aren't the possible returns much higher than say a CD or savings account?
An IRA is just a type of account, not an asset.

If you're referring to investing in a brokerage account (IRA or taxable) with equities or bonds then sure, you could possibly have much higher returns than a CD or a savings account. You could also possibly have much greater losses.

I'm not sure I understand what question you're asking.
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Old 12-31-2011, 11:09 PM   #10
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We recently did the I bonds for our son. Couple of years ago, Patelco Credit Union offered a Gr8 rate acct for kids, 8% int, then stopped when the rates tanked. Best ones have been local, some give $5 every qtr if you provide proof of a report card with at least 1 'A' (or equivalent)...gym always gets an 'A'. Nothing like free cash for kids! Also, this same bank has dollar levels to get free coin bank, then stuffed animals, and other small toys. there's 6 levels of freebies up to $750. Another bank gives freebie drawings of movie tix or book raffles, son won a hardcopy Harry Potter one yr and also threw summer bbq's w/hot dogs, burgers and fries. Now they've cut back to sno cones and popcorn, free pumpkins for halloween, etc. A third bank gives out "spending dollars" or ice cream certificates when a child makes a deposit of $100 or more (sometimes less if teller is generous) amt varies by the teller, sometimes 1, 2, up to 5. These are good at local stores, pizza, kiddie stores, etc. We keep all 3 active because it entice our son to save and get something "free" or fun in return for his efforts.
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Old 01-01-2012, 09:15 AM   #11
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An IRA is just a type of account, not an asset.

If you're referring to investing in a brokerage account (IRA or taxable) with equities or bonds then sure, you could possibly have much higher returns than a CD or a savings account. You could also possibly have much greater losses.

I'm not sure I understand what question you're asking.
I understand it's an account, but holding funds inside the IRA account will at least provide the possibility to earn a much higher return than a CD or savings account these days. Of course there is always the risk to lose, but even a conservative fund should earn a higher rate than these other options.

My only point was to clarify that even with the additional IRS burden, the returns are still potentially much higher with the right funds in an IRA, than a savings account or CD.
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Old 01-01-2012, 03:09 PM   #12
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I understand it's an account, but holding funds inside the IRA account will at least provide the possibility to earn a much higher return than a CD or savings account these days. Of course there is always the risk to lose, but even a conservative fund should earn a higher rate than these other options.
My only point was to clarify that even with the additional IRS burden, the returns are still potentially much higher with the right funds in an IRA, than a savings account or CD.
My point is that an IRA is unnecessary when you could just open a taxable brokerage account and invest the kid's money in the same "right funds". Many brokerages will custody a minor's taxable brokerage account, even if it has only $1000.

My original point was that few brokerages will subcustody a minor's IRA account, and T. Rowe Price is one of them. The bank that's holding a kid's savings account or CD might not be so eager to do the same assets (a savings account or a CD) in an IRA.

An even better point is that you can skip the brokerages & banks altogether. Instead of trying to make your kid filthy rich from your own investing prowess, you could teach your kid about money by "investing" it in a "Bank of Dad CD" paying one cent per dollar per month. Sure, that's an obscenely generous rate in today's economy, but young kids can't easily do percentage math. However they can sure figure out a penny per buck per month and that's a heck of an incentive to save & track their assets.

Later on you can make them do percentage math with a half a cent per dollar per quarter or whatever. And then you can introduce them to the concept of the "Kid 401(k)".

All of those techniques worked like a charm on our 19-year-old, starting when she was eight years old. The biggest problem she had was the financial peer pressure of first semester at college, and I think she's getting a handle on that now.
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Old 01-01-2012, 03:20 PM   #13
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There are two question. What type of account, how to invest. Regarding account, do you want the children to eventually have unrestricted access to the funds or do you want control now and forever. A UTMA account puts the funds in the name of the child but gives you control until they are age 18, at which time the money is theirs. An account in your name with funds earmarked for them assures you always have control, but you will also always have tax liability. If you have a specific use in mind, such a college expense, perhaps a 529 plan MIT work.
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