Investing for my children

[xray328]

Hi noob here.

I was considering starting an early retirement account for my kids (4 and 7). I was just playing the numbers today based on $100 a month, and I was shocked at the value of the account (in a good way).

I know I should be thinking about my retirement first, which I am, but I want to start a financial road for my kids and grandkids.

Any recommendations for a mutual fund to get into that allows a minimal initial investment with monthly transfers?

Thanks in advance!

 

[OAG]

I do not have any funds to recommend but, somehow "teach them to fish" comes to mind. Future education fund?

 

[xray328]

They both have 529's already established.

I just can't get past the "time" part of investing. I'm trying to take advantage of compounding interest. When I look at $50/paycheck for 58 years at a 10% return...

 

[FinanceDude]

They both have 529's already established.

I just can't get past the "time" part of investing. I'm trying to take advantage of compounding interest. When I look at $50/paycheck for 58 years at a 10% return...

How about custodial accounts?

 

[xray328]

I'm not familar with those....

 

[xray328]

After looking into it, my concern would be having to turn it over to them at 21, and not being able to turn it over to the other child in the event of a death of the first child.

 

[FinanceDude]

After looking into it, my concern would be having to turn it over to them at 21, and not being able to turn it over to the other child in the event of a death of the first child.

Well, "technically", how would they know you HAVE said accounts??

 

[xray328]

Good point. Any funds out there that would work well in this situation? I was considering:

Vanguard Total Stock Market Index

T. Rowe Price Spectrum Growth

USAA First Start Growth

 

[brewer12345]

Vanguard STAR

 

[cute fuzzy bunny]

I thought about establishing a separate account for my son, both for education and for savings.

After careful consideration, I decided to just invest the way I always do, pay for his education when the time comes from a variety of potential sources, some which may have tax advantages, and when I pass on, leaving him whats left as an inheritance.

He'll still get the benefits of a lot of years of compounding and I *hope* its 30-40 years before he'd receive the inheritance. That'd avoid him becoming a trust fund teen or coming into a lot of cash when he's not prepared to spend it in a responsible manner.

Best possible outcome: he receives a nice 7 figure inheritance when he's in his late 30's or early 40's when he's got a family and his life is settled and it enables him to be financially independent. And in the meanwhile the reserved funds assure we dont become a financial burden on him later in life.

 

[FinanceDude]

The only money I have in custodial accounts are from relative's gifts and the RMD's from my sister's 403B account they get EFT'd to their account on their birthday.......

I don't want them to have $50,000 when they turn 21 or anything like that..........

 

[Charlotte]

UTMAs

I don't want them to have $50,000 when they turn 21 or anything like that..........

I'm with FinanceDude. Many years ago, I had set up a Uniform Transfer To Minors Account (UTMA?) for my son and when it hit the 10k mark, I began thinking about what UTMA really meant. Essentially, it means that age 18, he would be of age to withdraw from the account and do anything that he wanted with it without my permission (yikes - and we know what great judgement most 18-year-olds have). So, we scrapped it, and rolled the whole thing into his 529 account - to be used for his education.

Charlotte

 

[Darryl]

Mine are 12 & 9. I use 529's but no other accounts for them. The compounding is more exciting when it's tax free. I think it's likely when they start to have earned income, that I will fund Roth's for them. It will be their money but hopefully they'll have the discipline to leave the accounts alone. I prefer to keep the bulk of our money under our control until they are (hopefully) old folks and inheriting it.

 

[SecondCor521]

FD,

An option to prevent that kind of irresponsible behavior is to threaten to write them out of the will if they do anything you consider too unruly. Usually the value of an inheritance >> a UTMA.

CFB,

I like your approach. An issue to think about is the estate tax haircut that you might face if you die with say, $10M in the bank. With a joint estate tax exemption of $4M and an estate tax rate of 45%, you're looking at a federal estate tax bill of $2.7M.

2Cor521

 

[cute fuzzy bunny]

An issue to think about is the estate tax haircut that you might face if you die with say, $10M in the bank.

I think i'd find a way to blow $5M or so of that on anna nicole smiths granddaughter before I go, but in the event that the cards go down that way, I imagine Gabe wont feel too bad about paying a couple of million in taxes on his way to becoming a rich, rich man.

I'm thinking its going to go through his brain the same way it did mine in 1998 and 1999 when I wrote six figure checks to the IRS and five figure checks to the FTB. Not thrilled...but look at what I've got that produced the need to write those big checks!

We'll probably lay it all in a trust once we get over some middling number that we havent reached yet.

We looked at utma's, 529's, coverdells, etc. Everything had some sort of hitch I didnt like or let him spend all the money before he's 26 or sooner. Versus the worst case scenario of paying a 15% capital gains tax...just didnt seem worth it to try and game it and lose flexibility.

 

[xray328]

What would happen if I opened the custodial account, and just kept it a secret from them? Can I hold onto a custodial account indefinitely? What happens to the account if I died before they were old enough to access it?

 

[SecondCor521]

What would happen if I opened the custodial account, and just kept it a secret from them? Can I hold onto a custodial account indefinitely? What happens to the account if I died before they were old enough to access it?

Well, if you got caught keeping it a secret from them after they reach the age of majority in your state (it varies, but I think is usually between 18 and 21), you would probably be violating some law, but I don't know what that law would be. Depends on how your kid takes the news that you were keeping their money from them...it's always legally their money, and they have the right to access it at that age.

If you die early and have named a successor custodian on the account, that person would assume your role as custodian. If there is no successor custodian, I bet the courts or the executor of your estate would appoint one.

2Cor521

 

[youbet]

What would happen if I opened the custodial account, and just kept it a secret from them?

You, or the kids, or both would do time in prison for failure to pay income taxes on the earnings from the account.

 

[FinanceDude]

You, or the kids, or both would do time in prison for failure to pay income taxes on the earnings from the account.

Um........the SECRET would be from THEM, NOT the IRS. You can still use their tax rate as a basis each year.........

 

[cute fuzzy bunny]

Wow, what a bonding experience. Spending a few years up the river with your kids...plenty of time to talk, tell jokes about the mystery meat, really getting to know each other. Decide to become better role models.

Maybe I need to rethink these secret tax free custodial accounts over a little more...

 

[Nords]

Um........the SECRET would be from THEM, NOT the IRS.

Without sharing the details in a situation I've learned of, lemme just say that the intergenerational resentment lasts for at least three decades. So keep that secret well.

Our kid's UTMA was started before Congress could even count to 529. We tell her that it's her college fund and that it pays out at age 21, when it also becomes her graduate-degree and house-down-payment fund. So there's no need to call dear ol' Mom & Dad for any further assistance!

 

[FinanceDude]

Without sharing the details in a situation I've learned of, lemme just say that the intergenerational resentment lasts for at least three decades. So keep that secret well.

Well, I have no secrets for my kids, they have custodial accounts and my dead sister's 403B money. The annual RMD's are funding the UTMAs. When they go to college, I am going to sit down with them and tell them the rules:

1)Your aunt wanted you to go to college and get an education, so she left you this money.

2)You will have enough to attend any public university in Wisconsin or any state Wisconsin has a reciprocity agreement with. if you go to private school, there may not be enough, so plan accordingly.

3)There will be enough money in your custodial accounts for spending money and miscelleaneous items you'll need at school. Again, when it's gone,it's gone, so plan accordingly.

4)If you decide to pay the taxes, take all the money out, drop out of school, and be a bum, just remember that she can watch you anyhwere you go. Do you really want that on your conscience??



As far as the current 529 plans go, my wife has a niece that's quite gifted and whose parents are pretty broke, so we're going to help her with college and grad school.