Investment Ideas for Newborn

[TedMunson]

Hi All;

In an attempt to get our new baby on the right track to early retirement I would like to start buying some investments for her. I really don't have much leftover after funding our retirement, but $50-100 a few times a year will add up over time, especially once I get the grandparents involved.

So, my question to you all is this, where would you put this first initial investment?

Thanks in advance for any and all ideas.

Ted

[sailor]

We opened 529 (education savings) plans for all little sailors as soon as we got their social security numbers (they are 5,3 and 1 now). All of them in my name, with the kids as beneficiary.

[brewer12345]

I just use a plain vanilla balanced fund in a custodial account. Nothing fancy, low cost, and most brokers/fund families have at least one inexpensive fund with low minimums.

[Poundkey]

DD and SIL opened a VG Star fund for our new granddaughter (10 months old). We plan to chip in a few bucks with each Christmas and birthday.....well, along with all the toys. She won't be spoiled at all.

[Bimmerbill]

My mom has been buying EE bonds for my DD. I have to admit, I have no idea how they work. She just asked me if I would like more bonds or a 529. I'm leaning toward a 529. DD is almost 4.

[av8er]

+1 for 529s.

[Maurice]

I opened a 529 for my little guy when he was less than a month old. I bought a vanguard total market fund.

[kyounge1956]

Quote:

Originally Posted by TedMunson Hi All; In an attempt to get our new baby on the right track to early retirement I would like to start buying some investments for her. I really don't have much leftover after funding our retirement, but $50-100 a few times a year will add up over time, especially once I get the grandparents involved. So, my question to you all is this, where would you put this first initial investment? Thanks in advance for any and all ideas. Ted

Target Retirement 2060?
Seriously, how far out do Target Retirement funds go?

[harley]

Apple and Coke! They'll own the world by the time the kid is in college.

[traineeinvestor]

Having re-read The Millionaire Next Door last weekend, I have to wonder just how much financial support is optimal for our children?

On a slightly more serious note, I would go with funding the education. If they can get decent education and have little or no student debt at the end of the process they will be off to a good start.

[Urchina]

We've chosen to save money in OUR names, but tagged for the kids' educations. We use Vanguard index funds and money market accounts.

Part of the reason we've decided to go this route is because when financial aid is calculated, money in the child's name currently is taken at a higher percentage than money in the parent's name. Also, if it's in our name, we can decide what happens with it and it's not legally the kids' (of course, having a 529 in your name takes care of this as well).

We're considering a 529, but haven't done all our research yet.

We fully fund our retirement accounts before a dime gets put into the kids' account. As the folks on this board have said so many times before, you can't take out loans for retirement, but you can for school!

[Bimmerbill]

I was funding a ROTH for a while. I think you can withdraw funds for education? And if they don't get used, you have the $ for retirement.

[RockyMtn]

I would suggest a 529 plan. There is a wide variety of ways that the funds can be used even if the kid ends up not going to a four year college.

Minors can only contribute to a Roth IRA to the extent that they have earned income. Unless the kid is a child actor its unlikely they will qualify until they get their first job.

Uniform Gift Trusts are another option although the earnings (cap gains, dividends, etc) are taxed at your rate and not the kids. Also, the money goes to the kid at 18 or 19 depending on the state you live in and technically they can do whatever they want with it.

[RunningBum]

Quote:

Originally Posted by RockyMtn I would suggest a 529 plan. There is a wide variety of ways that the funds can be used even if the kid ends up not going to a four year college. Minors can only contribute to a Roth IRA to the extent that they have earned income. Unless the kid is a child actor its unlikely they will qualify until they get their first job. Uniform Gift Trusts are another option although the earnings (cap gains, dividends, etc) are taxed at your rate and not the kids. Also, the money goes to the kid at 18 or 19 depending on the state you live in and technically they can do whatever they want with it.

The other drawback to the Uniform Gift Trust is as Urchina says, the money is considered to be the child's when calculating financial aid. A MUCH higher % of your child's net worth is considered against financial aid than yours.

I guess the drawback of a 529 is that it has to be used for college expenses or else you'll pay taxes + 10% penalty on earnings.

[youbet]

Look into the Coverdell Educational IRA. I'm using them for my three grandchildren. You can add $2k/yr per child and self-manage the investments just like a retirement IRA. Very flexible. Withdrawals for a very broad range of educational expenses are made TAX FREE, not tax defered. In other words, they work like a Roth, only the withdrawal money must be spent on a liberally interpreted list of allowable educational expenses. Unlike a 529b plan, you can pay educational expenses for a child at any age, so a computer for a middle school child would be OK. Tuition to a private elementary school would be fine. If one child doesn't use the money, it can be transfered to another. So, considerably more flexibility in terms of investment options and where/how you can spend the money tax free than a 529b, but, sadly, limited to only a $2k/yr per child contribution limit.

I have 3 grand kids, so that's $6k/yr total. That's about all we choose to gift at this time. If we could afford more (and still do the things we want to do in RE), we'd fund the Coverdells first and then place the remainder into 529b's.

[FinanceDude]

Quote:

Originally Posted by RunningBum I guess the drawback of a 529 is that it has to be used for college expenses or else you'll pay taxes + 10% penalty on earnings.

Not quite correct. ANY ACCREDITED institution is acceptable, which covers most technical colleges and trade schools. Plus, you can change the beneficiary to almost anyone you want, as high "up" as grandparents and as far "removed" as cousins. It has a lot of flexibility, and unlike the Coverdell Education IRA has no end date where you have to use the money by.

If your kid or kids turns out to be a handful, would you rather have the control to keep money away from him or have to cut him a check at age 21??

[youbet]

Quote:

Originally Posted by FinanceDude Not quite correct. ANY ACCREDITED institution is acceptable,

Better check on that FD. Isn't "post secondary school" part of the criteria? In other words, paying tuition/fees for private highschool or books or computers for public highschool would NOT be OK as it is in a Coverdell.

Also, where you mention "cut him a check at age 21," you're refering to custodial accts, not Coverdells, correct? There is no age 21 limitation with Coverdells.

Coverdells and 529b plans each have pros and cons. By opening both, you can maximize the pros and minimize the cons.

[FinanceDude]

Quote:

Originally Posted by youbet Better check on that FD. Isn't "post secondary school" part of the criteria? In other words, paying tuition/fees for private highschool or books or computers for public highschool would NOT be OK as it is in a Coverdell.

That is true........it has to be post high school......but the universe is pretty big. Plus, if the student qualifies for any academic or sports scholarships, the custodian can take out a matching amount of that scholarship with no penalties, and can do with the money what they want.........

I had one client with an interesting situation. The son was quite handy and wanted to work in the trades, so he went to tech school. The daughter was a gifted musician on the cello and got into Julliard. Both plans were funded equally. The son was older, so after he graduated from
tech school, the parents changed the beneficiary to the daughter so she had enough money to complete her studies at Juilliard. Worked out well for both.........

[FinanceDude]

Quote:

Originally Posted by youbet Look into the Coverdell Educational IRA. I'm using them for my three grandchildren. You can add $2k/yr per child and self-manage the investments just like a retirement IRA. Very flexible. Withdrawals for a very broad range of educational expenses are made TAX FREE, not tax defered. In other words, they work like a Roth, only the withdrawal money must be spent on a liberally interpreted list of allowable educational expenses. Unlike a 529b plan, you can pay educational expenses for a child at any age, so a computer for a middle school child would be OK. Tuition to a private elementary school would be fine. If one child doesn't use the money, it can be transfered to another. So, considerably more flexibility in terms of investment options and where/how you can spend the money tax free than a 529b, but, sadly, limited to only a $2k/yr per child contribution limit. I have 3 grand kids, so that's $6k/yr total. That's about all we choose to gift at this time. If we could afford more (and still do the things we want to do in RE), we'd fund the Coverdells first and then place the remainder into 529b's.

Coverdell has to be used by age 30..........

[youbet]

Quote:

Originally Posted by FinanceDude That is true........it has to be post high school......but the universe is pretty big.

Ugh! That doesn't sound good! So, dad loses his job while junior and sis are in highschool and you can't make tax free withdrawals to pay for books, computers, band uniforms, etc.? Hard to justify not using both 529b plans and Coverdells based on that situation.

Quote:

I had one client with an interesting situation. The son was quite handy and wanted to work in the trades, so he went to tech school. The daughter was a gifted musician on the cello and got into Julliard. Both plans were funded equally. The son was older, so after he graduated from tech school, the parents changed the beneficiary to the daughter so she had enough money to complete her studies at Juilliard. Worked out well for both.........

Doesn't the Coverdale cover that situation as well? And, if daughter was using a private music tutor pre-Julliard, Coverdell funds would have applied.

I understand why professional money managers frown on do-it-yourself plans like Coverdells, but I really think there is a workable strategy to harvest the benefits of both and maximize the benefit to the child. I do admit, however, that with a Coverdell, you don't get to be anyone's "client." The argument that you need to chose 100% Coverdell or 100% 529b plan doesn't seem to optimize the child's opportunity to benefit