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Investments for minors
Old 04-05-2015, 11:31 AM   #1
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Investments for minors

Hi folks,

I'm looking for input & advice on investment strategies for minors; for DW and I, it is for our primary-school aged kids. Both already have 529s in our name with their For the Benefit Of. What I'd like to do is get Vanguard taxable accounts for each so they can see their own amounts rise, fall, and compound, but right now we only have sub-$3k amounts so don't meet the minimum fund buy-in amounts. Once they are old enough to have taxable income, I intend to get Roth IRAs for them, but in the meantime what are some suggestions that have worked well in your situation? Any nuances to avoid or be careful about? Tax or future Federal Application for Student Aid gotchas? Thanks!
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Old 04-05-2015, 11:38 AM   #2
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Vanguard's STAR fund has only a $1,000 minimum. We used that for our kids, I suspect because they did not have $3,000 at the time.

https://personal.vanguard.com/us/fun...tExt=INT#tab=3
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Old 04-05-2015, 12:19 PM   #3
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You could also start them off with the total stock index and get them familiar with the beauty of indexing
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Old 04-05-2015, 01:06 PM   #4
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Thanks, Easy & PB. @PB, great to see about that STAR fund and its low entry bar. @Easy, yes would love to move them eventually to VSTAX.

What is the tax situation in this case? As our dependents, do the dividends & capital accrue to DW & mine's Married Filing Joint return?
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Old 04-05-2015, 02:39 PM   #5
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In a slightly different angle....give your kids a small gift of money to invest in some way. We did this with our kids when then were in Junior high. Told them they were being given a gift of money but had to decide how to invest it and learn from the experience. Discussed various investment options and eventually walked them through investing the money on line through my TDAmeritrade account. Then we'd discuss with them occasionally what their investment was doing and if they wanted to change it, sell it or keep it. Was a great learning experience for all three. Two of three chose hi tech stocks that failed miserably but the money lost was nothing compared to the experience gained. The third I think broke even and eventually sold the stock for something he wanted. As adults, now all three are aware of investing and actually saving / investing at a very early adult age. All three are looking to their financial futures better than I ever did at their age!
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Old 04-05-2015, 04:46 PM   #6
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Make sure you stay tax efficient. Kid tax laws will tax at your high rate .
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Old 04-06-2015, 07:13 AM   #7
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Do the kids get an allowance?

If you’re willing to put up with the extra paperwork, how about paying them as “independent contractors” to mow the lawn, houseclean, etc. It would let them put their earnings into an IRA account.
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Old 04-06-2015, 07:53 AM   #8
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Quote:
Originally Posted by growerVon View Post
....What is the tax situation in this case? As our dependents, do the dividends & capital accrue to DW & mine's Married Filing Joint return?
In most cases any dividend and capital gains will not be on your tax return but on theirs, and they will likely be under the amount where they need to file a return.

Quote:
The following two rules may affect the tax and reporting of the investment income of certain children:
  • If the child's interest, dividends and other unearned income total more than $2,000, part of that income may be subject to tax at the parent's tax rate instead of the child's tax rate. See the Form 8615 Instructions (PDF), Tax for Certain Children Who Have Unearned Income, or
  • If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to elect to include that income on the parent's return rather than file a return for the child. See Form 8814 (PDF), Parents’ Election To Report Child's Interest and Dividends.
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Old 04-06-2015, 07:55 AM   #9
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What a great idea. Think of how things might be if we did a small grant along these lines for every high school student.

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Originally Posted by Whisper66 View Post
In a slightly different angle....give your kids a small gift of money to invest in some way. We did this with our kids when then were in Junior high. Told them they were being given a gift of money but had to decide how to invest it and learn from the experience. Discussed various investment options and eventually walked them through investing the money on line through my TDAmeritrade account. Then we'd discuss with them occasionally what their investment was doing and if they wanted to change it, sell it or keep it. Was a great learning experience for all three. Two of three chose hi tech stocks that failed miserably but the money lost was nothing compared to the experience gained. The third I think broke even and eventually sold the stock for something he wanted. As adults, now all three are aware of investing and actually saving / investing at a very early adult age. All three are looking to their financial futures better than I ever did at their age!
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Old 04-06-2015, 05:34 PM   #10
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Originally Posted by growerVon View Post
yes would love to move them eventually to VSTAX.
While mutual funds are the "best" way to invest for the long haul, you also mentioned you want the kids to learn from the experience.

Consider investing in a couple of individual stocks of companies that the kids are familiar with. Following Disney stock or some other company that makes products they know about (Apple, McDonalds, Mattel, etc.) might be more interesting than a broad market index.

Once the money get's serious then it's time to start talking about diversification and how great indexes are in this regard.
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Old 04-06-2015, 05:59 PM   #11
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What I've done are custodial accounts for each of my nieces and nephews. I add money at birthdays and Christmas. These are of fairly modest amounts but it will be enough to get them some money toward a trip or perhaps a car. Depending on the state, the minor will have access to the funds at 18 or 21, so it isn't a good idea to put a lot of money in them if you have specific ideas for what it "should" go for.
As the custodian, the 1099s come to me and I pay the taxes.
I will set up Roths for them as they get older and will offer to match funds they contribute up to a certain amount.
I use OAKBX in them, mostly.
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Old 04-11-2015, 02:03 PM   #12
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Thanks for the additional responses, everyone. MPeirce (edit: and Whisper66), the idea of using individual stock in companies they recognize is intriguing and may be the better educational approach vs my min/max mentality. It is true I am thinking of this initially from a "taking care of them" perspective instead of educating them, but your point is giving me good pause.

I found another thread on bogleheads that has good reinforcing info; including it here for future folks who come looking for this type of info: Bogleheads • View topic - Where do you invest your child's savings?

Given the kiddo's non-529 savings are small right now, I'm going to have to wait maybe half a year before pulling the trigger on setting up custodial or guardian accounts for them at Vanguard due to the $1k fund buy-in (if I go the index fund route; see MPeirce's [edit: and Whisper66's] intriguing suggestion). I will report back on what I ended up setting up once that is done.

Thanks again, p33ps!
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Old 04-20-2015, 09:23 PM   #13
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ETFs could possibly be an option if you don't like the fund allocation in Vanguard's STAR fund or the Target Retirement Funds. I think you still need $1K account opening, though.
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Old 05-04-2016, 07:12 PM   #14
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Follow-up! It took longer than I expected, but this March I opened custodial brokerage accounts for the two kiddos at Vanguard with starter $1000 positions in Vanguard Target Date 2060, each. I had to call up an agent because their online account creation form didn't have obvious fields to indicate the custodial nature. Agent prepopulated the forms and left them in my applications area on the site, and I was able to submit upon next login.

DD is not too interested, but younger DS has caught the bug and been coming up with $10 here and $20 there to add to his fund. He loves seeing the chart and has been doing math on the 2% dividend (ballpark) and how another $50 will get him $1 a year... forever! And he's grokking the compounding aspect a bit, too. Ex, next year a 2% dividend would be $1.02 on the initial $50.

Glad this is providing some tangible investment education for DS and setting up good savings habits at the ripe old age of 8. DD isn't too excited but that's okay because the most important lesson I'm trying to impart is the wisdom of saving and safely investing.
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Old 05-07-2016, 07:01 AM   #15
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My kids are very young (2 and 4) but I opened brokerage accounts for then (obviously in my name) foe their retirement.

I seeded it with 5K each split 3K in US small cap value and 2K global small cap value (VSS and VBR).

Why? Well.... over really long terms small cap value has historically performed very well... although totally inappropriate for myself.

The intent of this account is for their retirement (potentially 60 years away). Over a 60 year period that 5K could be pretty big.

The second reason is just to jump-start their saving early. As they get older I'll make sure they see that money grow and encourage them to add to it. At 18 convert to a Roth or regular IRA (or whatever is around then) and then start to change the asset allocation, etc.

It's a very long term experiment that I hope to see through at least partly before I die

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