Savings for Children

[Tykimeister]

Hello, I wanted to know what are the best options for giving gifts to relatives like savings bonds? When I was young you could get a paper savings bond but now they are all online and require a SSN. I talked to my brother about opening a 529 but he doesn't seem as interested in it as I am. I would prefer not to have to twist his arm to get his kid's SSN.

Aside from a 529 or savings bonds, what are other options that earn an acceptable return and something I can set up by myself without the kid's SSN?

 

[njhowie]

Aside from a 529 or savings bonds, what are other options that earn an acceptable return and something I can set up by myself without the kid's SSN?

You could set up a 529 for yourself or anyone else who you have a SS# and birth date for and then switch it to the kid when the time comes - you are the owner and can change the beneficiary at any time. Surely when the kid approaches college age your brother isn't going to refuse a tax free gift to help finance college.

I am biased towards the 529 for having complete ownership/control, you generally have a good range of funds you can invest in (conservative to aggressive), and gains are completely tax free if used for education.

 

[Closet_Gamer]

We've set up a brokerage account that is devoted to future help to family members. We invest it tax efficiently and will pay any taxes due from the earnings in that account. A drag on growth to be sure, but super simple.

The two advantages:

1) Stealth -- they don't need to know you did it, why you did it, or that it exists.

2) Flexibility -- times change, circumstances change, people change. We expect the uses for this money to be 7 to 30 years in the future (varying purposes). But a lot can happen. We could need the money. The things we expect people might need help with can wind up being misguided. We might have new thoughts on the merit of providing the help or the readiness of an individual to receive that help. The person may also just not need it, in which case there are loads of worthwhile things to do with money other than have it tied up in a 529.

We also maintain a Schwab Donor Advised charitable account. Set side-by-side, this tax free and taxable account structure jointly comprise our long haul charity plan.

Hope that's helpful.

 

[njhowie]

The person may also just not need it, in which case there are loads of worthwhile things to do with money other than have it tied up in a 529.

For the situation OP describes, 529 is the best option - your situation/objective is very different.

Also, if not used for educational purposes, 529 funds can be withdrawn at any time for any purpose and any tax/penalty due is only on the gains.

 

[Tykimeister]

You could set up a 529 for yourself or anyone else who you have a SS# and birth date for and then switch it to the kid when the time comes - you are the owner and can change the beneficiary at any time. Surely when the kid approaches college age your brother isn't going to refuse a tax free gift to help finance college.

I am biased towards the 529 for having complete ownership/control, you generally have a good range of funds you can invest in (conservative to aggressive), and gains are completely tax free if used for education.

Thank you for the suggestions. One thing I need to consider is if I at some point have kids of my own. Will starting the 529 for myself affect the contributions I make down the road for another individual? Can the funds be spread out among 5 different kids, if the entire 529 is all in my name?

 

[Tykimeister]

We've set up a brokerage account that is devoted to future help to family members. We invest it tax efficiently and will pay any taxes due from the earnings in that account. A drag on growth to be sure, but super simple.

The two advantages:

1) Stealth -- they don't need to know you did it, why you did it, or that it exists.

2) Flexibility -- times change, circumstances change, people change. We expect the uses for this money to be 7 to 30 years in the future (varying purposes). But a lot can happen. We could need the money. The things we expect people might need help with can wind up being misguided. We might have new thoughts on the merit of providing the help or the readiness of an individual to receive that help. The person may also just not need it, in which case there are loads of worthwhile things to do with money other than have it tied up in a 529.

We also maintain a Schwab Donor Advised charitable account. Set side-by-side, this tax free and taxable account structure jointly comprise our long haul charity plan.

Hope that's helpful.

I like the idea of the stealth advantage. But 20 years from now I do want them to see that every year that they were alive I put X amount of money aside for them and investing in their future. If I give them the money for college, what would make them see the heart felt gesture of putting money aside for them year after year rather than just pulling out the check book when tuition is due?

 

[njhowie]

Thank you for the suggestions. One thing I need to consider is if I at some point have kids of my own. Will starting the 529 for myself affect the contributions I make down the road for another individual? Can the funds be spread out among 5 different kids, if the entire 529 is all in my name?

Put simply - no, there is nothing to worry about.

If you want to easily navigate the possibility of wanting to split among X kids in the future (some of who may not even be born yet), the way to do it is to open multiple 529s for yourself. There are no restrictions or limitations on how many you can open. Each could change to a different beneficiary/kid down the road or you could assign multiple to the same kid if there are fewer than you anticipated. That is easier than splitting an existing one at a later date.

There is the annual gift tax limit (currently $15,000/recipient) which comes into play if you go over that in contributions. But that rarely happens as 529s also allow for 5-year averaging of contributions if you are above that. In the worst case, if you go over $75k per individual with the 5-year averaging, then the overage would come out of your estate tax limitation. So again, the limits are very high before you have anything to be concerned about.

 

[cathy63]

I like njhowie's idea of setting up multiple 529 plans for yourself and then transferring them to your family members when the time comes.

I don't even think you should be affected by the gift tax reporting requirements. If you're putting your own money into accounts where you're the beneficiary, then there's no gift, so need for reporting. I just did a quick Google search so I may have missed it, but as far as I can see, when you change the beneficiary in the future, it's not considered a gift and doesn't have to be reported then either.

One thing to beware of for the future, is that there's a maximum aggregate amount you can have saved for a single person. If you end up with a bunch of different accounts and you're the listed beneficiary for all of them, then you can't make any additional contributions once the total value of your savings reaches your state's maximum. Your profile says you're in North Dakota, so for your state it's $269K, which is one of the lowest limits in the country. You can open additional accounts in other states if you do hit the limit.

In North Dakota, you can also deduct $5K in contributions on your taxes as long as you use your state's plan.

 

[Tykimeister]

Put simply - no, there is nothing to worry about.

If you want to easily navigate the possibility of wanting to split among X kids in the future (some of who may not even be born yet), the way to do it is to open multiple 529s for yourself. There are no restrictions or limitations on how many you can open. Each could change to a different beneficiary/kid down the road or you could assign multiple to the same kid if there are fewer than you anticipated. That is easier than splitting an existing one at a later date.

There is the annual gift tax limit (currently $15,000/recipient) which comes into play if you go over that in contributions. But that rarely happens as 529s also allow for 5-year averaging of contributions if you are above that. In the worst case, if you go over $75k per individual with the 5-year averaging, then the overage would come out of your estate tax limitation. So again, the limits are very high before you have anything to be concerned about.

That makes a lot more sense. Thank you for that.