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Saving for Children
Old 07-23-2008, 08:03 PM   #1
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Saving for Children

Hello,

I wasn't sure where to put this so I put it in the forum that most applies to me, a young dreamer.

What is the best way to save money for children under the age of 18?

The college 531 or whatever plans are probably not a good idea since there is no guarantee they are going to college.

Is there a tax efficient way for a low income mom to be putting money away for them?

An IRA for each child?

Any thoughts would be appreciated.

Thank you,
-Raymond
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Old 07-24-2008, 11:10 AM   #2
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And IRA is good for older kids who can actually make some money, but I don't think a kid can have an IRA unless he/she earns income. Everybody plays fast and loose with the IRS, but I'd say you'd have to really be shoveling it to pretend any kid under, oh, say 8 years old can earn any substantial income.

529 plan for college isn't a bad idea, if your state offers any tax breaks (e.g. NY allows up to 10K per year state-tax deductible) and has low-cost mutual fund options (NY uses Vanguard). You can transfer it to other family members if your kid doesn't use it, but it's good for trade schools, university, graduate studies ... so chances are your kid will need some education beyond high school.
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Old 07-24-2008, 01:11 PM   #3
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Currently, I'm earmarking part of or money-market for jr's college fund. I'm kicking around the state 529 plan because of the state tax benefits.

Education IRAs are a possibility. I can't remember their formal name.
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Old 07-25-2008, 07:44 AM   #4
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Education IRAs are a possibility. I can't remember their formal name.
I believe they're called Coverdell accounts. They have annual limits for deposits (last time I checked it was $2000 per year) and there are also limits related to your annual household AGI. We're no longer able to deposit to our kids accounts because we exceed the AGI limits.

We have 529 accounts for our children that we continue to grow. My expectation is that they will both go to college... however, if one doesn't (or both don't), the accounts are transferable to another beneficiary (including yourself) or you can withdraw the money with some penalties incurred.

We had considered UTMA accounts for the kids, but backed away from that. At 18, the kid is legally entitled to the money, with no guarantee that they would use it for the reason you intended it! Not going down that road...

Charlotte
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Old 07-25-2008, 09:02 AM   #5
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If you are a low-income mom, then I have to question if you should be putting much money away for your kids, or if you need to worry about tax-efficiency. If your kids do go to college, money in their own name might hurt your financial aid (though having it in an IRA may shelter it). If you have completely maxed out your own qualified accounts (401k, IRA) and your kid has earned income, then a Roth IRA might be a good idea.
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Old 07-25-2008, 12:12 PM   #6
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If you are a low-income mom, then I have to question if you should be putting much money away for your kids, or if you need to worry about tax-efficiency. .
I agree with the above. Don't know whether she has the funds to do this
(or is doing it already) but it is an interesting idea:

You can get a qualified retirement savings credit for contributions to a retirement plan or IRA. How much you get is a function of filing status,
AGI, amount you contribute. Fill out the form 8880 to find out how much
http://www.irs.gov/pub/irs-pdf/f8880.pdf

If she is single, makes less than $26000 AGI and makes a $2000 retirement plan or IRA contribution, she would get a $200 credit. If she is head of
household, she could make up to $39000 and get that credit (2007 figures; might be slightly different for 2008). If she is HOH and makes less than $23250, the credit could be up to $1000.

I assume she is already getting the EIC (earned income credit) associated
with filing status and no. of kids and other credits related to having kids?
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Old 07-25-2008, 12:47 PM   #7
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We have both UGMA and 529 accounts for the kids.

The advantage of the UGMA is that the first $700 is tax free and the next $700 is taxed at the child's rate. After that it is taxed at the parents rate. I view it has a $700 tax deduction. The disadvantage as someone has already mentioned is that the minute they turn 18 they can do what ever they want with. We have enough in the UGMA accounts that we are usually near the $1400 year value and therefore no longer contribute to them.

The advantage of the 529 is that it is tax free when used for college expenses and is very flexible in that it can be transferred from person to person and the parent can retain control of the money. The disadvantage is there is a penalty if it not used for education.

If I was just starting out and had limited funds I would probably put it in the 529 but that is just my opinion.

You should also check out the Coverdell.

MB
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Old 07-25-2008, 12:51 PM   #8
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If you are a low-income mom, then I have to question if you should be putting much money away for your kids, or if you need to worry about tax-efficiency. If your kids do go to college, money in their own name might hurt your financial aid (though having it in an IRA may shelter it). If you have completely maxed out your own qualified accounts (401k, IRA) and your kid has earned income, then a Roth IRA might be a good idea.
Good point.

Most "experts" will tell you to take care of your own retirement before worrying about the kid's education and/or retirement.

With regard to the kids, my philosophy would be to take care of their education so that they can be in a position to take care of their own retirement.

MB
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Old 07-25-2008, 01:45 PM   #9
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I am currently holding money for each of my children until they have an earned income. At that time I plan to open a Roth for each respectively. If they leave it alone it will be a great start to their ER.

By the way of a blessing from grandparents, each of their college expenses will be provided for.

Perhaps I should check into the UGMA accounts for tax purposes.
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Old 07-25-2008, 02:25 PM   #10
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UTMA/UGMA for cash gifts from relatives and other "reward money".(Do NOT use as a primary funding account).

529 Plan - advantage is that if the kid becomes as bum, you can change the person who can use it to nearly anyone, including you, spouse, nephew, etc. Plus, if you do just cash it out, you only pay taxes on the GAINS, not principal. For now, it't also tax-free to withdraw, although I feel it is unlikely to last with a Democratically-controlled Congress.............
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Old 07-26-2008, 11:04 PM   #11
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Popowich, NY college savings 529 plan is pretty good for saving money for kids' college tuition. You can always change the beneficiary of the plan depending on who will need it.

Another suggestion is to put the money into a Roth IRA. If your company offers 401k Roth with matching contributions, that's a gimme (my employer offers this). If not, you can put contribution to your Roth which can be given to your kids when you pass on.

Lastly, I've heard about situations where the child 'works' and shows an income which qualifies them to contribute to their own Roth IRA.

Good luck
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Old 07-30-2008, 11:31 AM   #12
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Lastly, I've heard about situations where the child 'works' and shows an income which qualifies them to contribute to their own Roth IRA.
Good luck
Minor Roth IRAs are sweet, my kids will each have one, whether they like it or not............
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Old 07-30-2008, 11:44 AM   #13
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If you are looking for financial aid in college, UTMA/UGMA is considered the child's asset, and a MUCH larger % of that is expected to be used for education than the parents assets. A 529 is considered the parents' asset.
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Old 07-31-2008, 12:33 PM   #14
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I'm still conflicted about saving on behalf of children. I didn't take college seriously until my "free" money ran out and I had to get my own loans/jobs...then I busted my butt.

Not to mention that putting money in 529s is just buying into a (imho) very flawed higher education system that has gotten out of control financially.

On the other hand, no one wants his kids to be disadvantaged...

I just had my first so we'll see how my opinion changes in the coming years
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Old 07-31-2008, 08:14 PM   #15
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Minor Roth IRAs are sweet, my kids will each have one, whether they like it or not............
We recently have been talking to our accountant about this Roth IRA concept for our twelve year old. She gets 'paid' for doing certain chores around the house. This is NOT her allowance, but we do pay her for doing certain tasks. She is also at the age where baby sitting is starting to happen. Great part is that we can buy the IRA, she just has to earn the money as I understand it. Our accountant is looking further into it, but I am gathering that if you can show she 'earned' the money and have records that can prove it, then the Roth can be justified. Our goal is to get her a min. $1000 Roth IRA until she is 18 and then let her take it from there.

My question is how do you do the bookkeeping? Simple notebook work for the IRS? What do you do if I might ask? And is a Minor Roth IRA different then just a Roth IRA?
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Old 08-01-2008, 09:51 AM   #16
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We recently have been talking to our accountant about this Roth IRA concept for our twelve year old. She gets 'paid' for doing certain chores around the house. This is NOT her allowance, but we do pay her for doing certain tasks. She is also at the age where baby sitting is starting to happen. Great part is that we can buy the IRA, she just has to earn the money as I understand it. Our accountant is looking further into it, but I am gathering that if you can show she 'earned' the money and have records that can prove it, then the Roth can be justified. Our goal is to get her a min. $1000 Roth IRA until she is 18 and then let her take it from there.

My question is how do you do the bookkeeping? Simple notebook work for the IRS? What do you do if I might ask? And is a Minor Roth IRA different then just a Roth IRA?
I might be wrong but such house chores paid by the parents won't qualify her for a Roth IRA. However if you were an enterpreneur and your DD cleaned your house office, prepared coffee for your clients, or some other chores and got paid for them, then such earnings would look justified to the IRS, IMO.
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Old 08-01-2008, 11:14 AM   #17
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We recently have been talking to our accountant about this Roth IRA concept for our twelve year old. She gets 'paid' for doing certain chores around the house. This is NOT her allowance, but we do pay her for doing certain tasks. She is also at the age where baby sitting is starting to happen. Great part is that we can buy the IRA, she just has to earn the money as I understand it. Our accountant is looking further into it, but I am gathering that if you can show she 'earned' the money and have records that can prove it, then the Roth can be justified. Our goal is to get her a min. $1000 Roth IRA until she is 18 and then let her take it from there.

My question is how do you do the bookkeeping? Simple notebook work for the IRS? What do you do if I might ask? And is a Minor Roth IRA different then just a Roth IRA?
If you are going to pay her to do certain chores, MAKE SURE you have a paper trail. The IRS puts the onus ON YOU in case they inquire......
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Old 08-01-2008, 11:15 AM   #18
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I gotta say, that worries me to death! I know of some folks who pay their kids to be "models" for their businesses (put up pictures of them in the lobby) and I think that is skirting it a bit. But to pay them for household work and do Roths for the "earned income" would make me sweat, big time. What does your CPA say about it?
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Old 08-01-2008, 01:38 PM   #19
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I gotta say, that worries me to death! I know of some folks who pay their kids to be "models" for their businesses (put up pictures of them in the lobby) and I think that is skirting it a bit. But to pay them for household work and do Roths for the "earned income" would make me sweat, big time. What does your CPA say about it?
Most CPAs would say: "do what you want"...........
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Old 08-01-2008, 02:23 PM   #20
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I gotta say, that worries me to death! I know of some folks who pay their kids to be "models" for their businesses (put up pictures of them in the lobby) and I think that is skirting it a bit. But to pay them for household work and do Roths for the "earned income" would make me sweat, big time. What does your CPA say about it?
Well I have not heard back from him yet, but I have been with him a long time and I trust him on these types of issues. On other similar issues he has done some research and then came back with his advise and let me decide from there. I am pretty comfortable that he won't advise me to do something that he or I would not be comfortable with. If it ends up sounding too dicey, then we likely won't do it. But if we can do it, then why not! I actually sent him the links from the FAQ section which I found last night to help him in his research. I figured I am not an accountant and he is. If he needs my professional advise as an Architect I would do my research and give him my advise to do as he wishes. Same thing here I would think.
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