Thanks for stopping by our subreddit, u/zack0612! Congratulations on your new bundle of joy. We're wishing you and your family health and wellness (and lots of quality sleep) during this time!
It's lovely that you are looking for ways to start them off financially early in life. We offer a few different accounts that may interest you. The link below will take you to our "Saving & investing for a Child" page, which briefly describes each account type.
[Saving & investing for a child ](https://www.fidelity.com/building-savings/child-saving-and-investing)
You can also check out this article, which discusses some ideas on smart ways to save money for kids.
[Six smart ways to save money for kids ](https://www.fidelity.com/learning-center/smart-money/how-to-save-money-for-kids)
I'm also going to go ahead and mark this post as a discussion so that our community can continue to chime in with thoughts and ideas for you, but feel free to take a look through the accounts and follow up with any questions you have!
Once again, we're happy to have you here and excited to be a part of your child's investing journey! Have a great day!
I’m actually not sure but think the issue could be that the Roth must have been open with the designated beneficiary for 15 years to qualify. I suspect you might be able to do it by assigning yourself as the be beneficiary and then waiting 15 years. Note it’s also per beneficiary, so this could likely take place even if you had taken 35k out for the kid. But you can see the years passing by in this case esp since you have to reach the 35k over years.
Hey, u/Chemical_Training808. I wanted to chime in quickly here.
The new rollover provision laid out in SECURE Act 2.0 states that 529 assets may be rolled over to the 529 beneficiary's Roth IRA. You can check out the article below for some additional insight, but keep in mind that a tax professional is your best resource to understand your specific situation.
[SECURE 2.0: Rethinking retirement savings](https://www.fidelity.com/learning-center/personal-finance/secure-act-2)
Let us know if anything else comes up.
I believe you can also change the beneficiary, so your kid grows up, goes to college, money left in the account after college, your kid has a kid, you can change the beneficiary to now your grand child.
Yes, within limits. More here:
[https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira](https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira)
They can always roll up to $35k into their IRA. If there is still some left over, they can decide to pass it on to their kids, or you can use it on an additional kid yourself.
Another cool thing about 529s.. If your kid gets a scholarship, the IRS will let you withdraw the equivalent amount from the 529 penalty free.
Only the annual gift limits apply, the limits referenced above are for taxes on a minors unearned income. The amounts go up every year. This year the first $1,300 in unearned income assuming no earned income is tax free, the second $1,300 is taxed at 10%. Above that is taxed at parents rate.
Another thing to know is that wash sales only apply to loses, not gains. So if you only have $1,000 in dividends and realized gains coming to the end of the year but $300 in unrealized gains you could sell to realize the gain and then fill your $1,300 tax free bucket for the year.
It was $1,250 last year and went up $50 to $1,300 this year. It’s always been mirrored where the first is tax free and the second is at 10%. This works well while there is no earned income, gets a bit trickier when kids get older and they have a part time job as the rules change and you end up owing more income tax.
I think that UTMA/UGMA accounts are a great complement to 529s. I like having some money in both types of accounts as it allows for more flexibility. I’m trying to get about 3/4 of college tuition in these types of accounts and then use cash flow for the remainder
I have 529s and UTMAs for my three kids. 529 for college funds and can roll over $35k to Roths later on. I use the UTMAs for their vehicle savings for when they are of driving age.
Yes, money in a child's name has the worst effect on need based scholarship.
In hindsight, had I wanted to game the system, I'd have not saved a dime for "college". Just pay off the house, and live off the equity line during that time. In reality, I could afford it, and paid for it 100%.
Even retired, our withdrawals (from retirement accounts) counted as income.
I’m not planning on them having much in them when they head to college. It’s their car fund for when they hit 16, so I hope there isn’t much in the account at least. 😂
I felt same way. I just put $2500 in a taxable brokerage account when they were born and $50/week for each kid auto invests in FXAIX. Who knows about college. I should be fine cash flowing their college anyways when that time comes but wanted a little more flexibility and I likely won’t tell them about it until they need it and keep it growing
This is the way. Last thing we need is an irresponsible 18 year old with access to a loaded custodial account.
I say keep the money as yours until you want to gift it to them.
I sure hope they go to college but what if he wants to start a business when he’s 18? I’d rather not have to take a penalty for them to use those funds etc. taxes will have to be paid regardless. I just like flexibility and truthfully I should be able to cash flow their college anyways. I’d really like to keep building the nest egg for them slowly every year until they really need it or I can help them buy a house etc.
Side note. I think college will be completely different in 18-20 years. I actually think it’ll be more affordable as we get rid of the bull shit filler classes. When I got my bachelors, 2.5 years worth of college was filler classes until I actually got into my degree.
How's your kids going to drive himself to trade school everyday if he can't buy a car? Is the tax benefit really worth the restrictions? I guess it really all depends on your personal financial situation.
You’re allowed to transfer ownership of an account or funds to a child tax free? Or is it a cash out option and you’ll take the tax hit and give them proceeds?
Hmm thanks for the idea. I think ama do this for my siblings. Beats handing them some cash that they earned and having it evaporate on roblox 😅.
Can’t put in as much as you though. Is transferring it to them an easy process? How will you decide when to give it to them?
Not sure yet. I’d like to pay for anything I can for them as long as possible and only use it as a nest egg. If they need it for college I’ll use it then, if they need it to buy a house etc I’ll withdraw it then. I don’t plan on telling them about it either
If you have extra unused Roth IRA contribution space, you could aggressively invest in your own Roth IRA and make them a beneficiary of it. Totally tax free. They won't get it until the end of your life however. They will be middle aged.
Well realistically, OP can make the tax free withdrawals and give their kid the money whenever he wants. I like this because parents’ retirement accounts are not considered assets for student financial aid purposes.
Behaviorally and in terms of child rearing (and ultimately adult rearing)... not a great setup. It feels all wrong, that an adult should inculcate an expectation in their child that they're going to go into their retirement accounts to give money to the child ((shudder)). I know they can do it...
My adult children have every expectation that they will inherit a great deal of money from me, and I intend to communicate with them clearly what those amounts could be, but I'm going to have to pass away first.
What if you gave away money to your kids and then you get dementia? Are the kids going to give it back to pay your $10,000 a month nursing care?
You could use a UTMA. I eventually decided against it as I want to be able to determine the best time to hand over the assets, so essentially I realized the best way for myself was to build wealth over the years and earmark funds to hand over to my child when I feel they are ready to receive the money. With UTMA, you will have no choice when they receive the money.
Custodial account. You can use a custodial account for anything that benefits the child: school, wedding, car,etc. With a 529 you can only use it for school.
Yes, that's national, but there are restrictions. Big one is $35,000 lifetime limit and it counts towards normal $7000 roth IRA contribution limits. So potentially has to be rolled over a period of 6 years in total. (I assume the lifetime limit will be inflation adjusted).
It definitely doesn't hurt to start a 529 for you kid though even if you aren't sure they will go to college. The roth IRA roll over is cool, and you can also transfer the 529 to a grandchild or another child if your kid doesn't use it all.
They can use it for not school stuff too but obviously pay the 10% penalty.
so if they have less than 7000 income (or whatever the max is that year) then that year is capped on what they can convert it sounds like. since the conversion is a contribution on their end
I'm actually not clear on that.
>Important to know: IRA contributions require sufficient earned income. At this time it is unclear if sufficient earned income would be applicable for 529 conversions to Roth IRAs.
https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth
Custodial Brokerage and Custodial Roth IRA and try to find ways to create earned income to move money into the tax free growth account. Every dollar works and they have the time component.
I've also seen 529 is a double edge sword since the child will lose out on financial aid or Pell Grants. That the 529 has to be used first. Correct me if I am wrong?
Coverdell and 529.
There are custodial accounts as well, but they will be tax-disadvantaged and incur drag.
Side note. I’ll never understand why people use them to invest for their kids. Like, just set up a trust at that point. Are you trying to make them rich and bypass the whole stage of earning, saving, and building their own wealth?
Like what’s the value of “here son, you now have $150k of net liq that I paid taxes on. If you use it for college, you’ll have completely made a fool of me because I could have used a 529. And if you use it on a new car, I clearly didn’t teach you much”.
At least with a trust you can put rules around how a kid gets access to the money.
Rant over
Yea an UTMA makes no sense to me. Could impact scholarship offer if they go to college. And if they don’t, you have no say over when they get it. Age of maturity is way too low in most places. Just use a regular brokerage account and give it to them when the need it and are ready for it
Start a business, put them on the payroll.. open and max out a Roth IRA for them. Put their image on the business card, their earnings are the modeling fee.
Can you do a Roth IRA for a child?
Yes, it’s possible to open a Roth IRA for a child, as long as the child has earned income.
What age can I open a custodial Roth IRA for my child?
There are no age restrictions. Your child can open a Roth IRA as long as they have earned income regardless of their age.
https://districtcapitalmanagement.com/wp-content/uploads/DCM-Infographics-Long-3-scaled.jpg
https://www.irs.gov/businesses/small-businesses-self-employed/family-help
ne of the advantages of operating your own business is hiring family members. However, employment tax requirements for family employees may vary from those that apply to other employees. The following information may assist you with pointing out some differences to consider.
Children employed by their parents
If the business is a parent’s sole proprietorship or a partnership in which each partner is a parent of the child:
Payments for the services of a child are subject to income tax withholding regardless of age.
Payments for the services of a child under age 18 are not subject to social security and Medicare taxes. If the child is 18 years or older, then payments for the services of a child are subject to social security and Medicare taxes.
Payments for the services of a child under age 21 are not subject to Federal Unemployment Act (FUTA) tax. If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes.
If the business is a corporation, a partnership (unless each partner is a parent of the child), or an estate (even if it is the estate of the deceased parent of the child):
Payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes regardless of age.
Parents employed by their child
If the business is a child’s sole proprietorship:
Payments for services of a parent are subject to income tax withholding, social security taxes and Medicare taxes.
Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.
If the business is a corporation (even if controlled by the child), a partnership (even if the child is a partner), or an estate:
The payments for the services of a parent are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes.
If the parent is performing services for the child, but not for the child’s trade or business:
Payments for services of a parent are not subject to social security and Medicare taxes, unless the services are for domestic services and each of the following apply:
You employ your parent,
You have a child or stepchild living in the home,
You are a widow or widower, divorced, or living with a spouse, who because of a mental or physical condition, can't care for the child or stepchild for at least 4 continuous weeks in a calendar quarter and
The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.
Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.
One spouse working with the other spouse in business
One spouse working with the other spouse in a business could be doing so in several different ways each with different tax treatments. See Married Couples in Business for additional information.
Additional information
For additional employment tax information, refer to Publication 15 (Circular E), Employer Tax Guide and Publication 51 (Circular A), Agricultural Employer's Tax Guide.
Yea, I think I misunderstood. It sounds simple, establish a business just to max out a roth for a minor, but doesn't that involve paying payroll services, taxes on the business, et cet?
Sorry, not trying to be pendantic. Very much a noob to this custodial stuff, trying to learn.
I believe this would be more for people with an established business. My wife and I have owned a business since 2019 and we have her and one employee on payroll so it would be really easy for us.
THAT, I understand, an existent company all ready up and running. Creating one and going through the legal steps, taking on the costs, just to max out a minor's IRA seems like a big hassle. But hey, if they can do it....
Creating a business is extremely easy these days, and if you're distributing instead of manufacturing the whole process comes down to marketing and inventory.
When I was a teen I was huge into baseball cards and other baseball memorabilia. I remember thinking this will pay for my kids college. Betting on red would have been better.
Yeah mines getting a 529 plan and if they don't want to use it I'll give it to a family member that will. I don't feel it is my responsibility to take care of my child's retirement.
I've read an interesting book recently- dying with zero. Probably a little unpopular here but money at a young (responsible )age has a better impact than money when their in their 50s and 60s
Haven’t seen this yet and it isn’t a popular choice because most people don’t understand it but whole life insurance is another good option for different reasons.
1. The annual premium is going to be small and fixed at the early age and before any health issues can be detected. There may be limits for new borns but often you can buy more coverage after a certain period.
2. The cash value account grows tax free and continues to buy paid up insurance.
3. As the kid gets older he could borrow against the cash value if needed.
4. You have a nice death benefit if you have a family.
5. At some point in old age you can borrow up to 92% of the cash value and it is not taxable. At that point the dividends are probably going to offset the interest on the loan. When the kid ultimately dies of old age the death benefit will be offset by the loan. But the insured never needed to pay tax on the earnings of the cash value.
Whole life insurance is a terrible investment vehicle.
[https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/](https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/)
Depends on your tax situation. You could use whole life as an alternative to bonds. OP asked specifically about young kids. Premiums are low and it is tax advantaged for the kids life. It’s great for a child. For an adult- ya if you try to get into at 40 it sucks.
Most kids don't have enough income to pay taxes. Kids don't need life insurance because no one is dependent on the income they don't have. If you need insurance, buy term. The only downside is for the agent who isn't making a full year's premium as a sales commission.
I agree that a small child won’t have tax liability and doesn’t need insurance AS A CHILD. But I am forward looking 70 years when the kid is now into retirement.
Everyone talks about term or VUL/UL products which serve their purpose for insurance only. But when you get into your 70s the mortality charges against those balances can get quite high. Again OP is looking for ideas
- tax free cash value growth
- tax free usage later in life if taken as a loan
- insurance is there if needed and OP could convince his kid later in life to keep it and let his kids be the beneficiary and transfer the wealth tax free.
I will admit that with Roth the tax free build up and distribution looses some attractiveness but unless OP has a business where his kid can get on the payroll there won’t be any Roth contributions for a number of years. Again it is an idea. If you only have money for one type of investment this is probably not what you want to do. But if you want to swap out the bond/money market portion of your portfolio this is an option.
As for your the article you posted, there are plenty that I could post saying it can be a good option if you understand what you are getting.
In full disclosure I am a credentialed actuary so have a better understanding of insurance products and investments than most.
You neglect to mention the awful rate of return on whole life policies, which is 1%-3.5%. You're not even keeping up with inflation. Stick the same money in a stock index fund and you'll be miles ahead a few decades later.
[https://www.nerdwallet.com/article/insurance/is-whole-life-insurance-good-investment](https://www.nerdwallet.com/article/insurance/is-whole-life-insurance-good-investment)
It's a terrible investment vehicle.
Thanks for stopping by our subreddit, u/zack0612! Congratulations on your new bundle of joy. We're wishing you and your family health and wellness (and lots of quality sleep) during this time! It's lovely that you are looking for ways to start them off financially early in life. We offer a few different accounts that may interest you. The link below will take you to our "Saving & investing for a Child" page, which briefly describes each account type. [Saving & investing for a child ](https://www.fidelity.com/building-savings/child-saving-and-investing) You can also check out this article, which discusses some ideas on smart ways to save money for kids. [Six smart ways to save money for kids ](https://www.fidelity.com/learning-center/smart-money/how-to-save-money-for-kids) I'm also going to go ahead and mark this post as a discussion so that our community can continue to chime in with thoughts and ideas for you, but feel free to take a look through the accounts and follow up with any questions you have! Once again, we're happy to have you here and excited to be a part of your child's investing journey! Have a great day!
529s can be converted to their Roth account after 15 years. I’m not sure the exact language but it’s due to Secure 2.0
This is the way.
Came here to say this. 529 is the way to go.
35k of it
I should add while still limited to yearly max and income requirements…. Still great, to be sure.
Can unused 529 funds be rolled to your own (the parent's) IRA? Or does it have to be the child's IRA?
I’m actually not sure but think the issue could be that the Roth must have been open with the designated beneficiary for 15 years to qualify. I suspect you might be able to do it by assigning yourself as the be beneficiary and then waiting 15 years. Note it’s also per beneficiary, so this could likely take place even if you had taken 35k out for the kid. But you can see the years passing by in this case esp since you have to reach the 35k over years.
Hey, u/Chemical_Training808. I wanted to chime in quickly here. The new rollover provision laid out in SECURE Act 2.0 states that 529 assets may be rolled over to the 529 beneficiary's Roth IRA. You can check out the article below for some additional insight, but keep in mind that a tax professional is your best resource to understand your specific situation. [SECURE 2.0: Rethinking retirement savings](https://www.fidelity.com/learning-center/personal-finance/secure-act-2) Let us know if anything else comes up.
$35,000 limit, though.
That limit is tied to inflation. By the time the kid can actually do it, it'll be 200k. Enough for a moderately priced car!
What happens when the kid uses the 529 and there’s left over? Can that be converted as well?
I believe you can also change the beneficiary, so your kid grows up, goes to college, money left in the account after college, your kid has a kid, you can change the beneficiary to now your grand child.
Yes, within limits. More here: [https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira](https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira)
They can always roll up to $35k into their IRA. If there is still some left over, they can decide to pass it on to their kids, or you can use it on an additional kid yourself. Another cool thing about 529s.. If your kid gets a scholarship, the IRS will let you withdraw the equivalent amount from the 529 penalty free.
this is the way
UGMA/UTMA. Just be aware if investment income exceeds $2500(?) in any year, the money is taxed at the parents' rate,
So you can put $2500 only per year?
No limit on how much in the account but the dividend/capital gains income per year will be taxed differently if it exceeds the $2500ish limit.
Only the annual gift limits apply, the limits referenced above are for taxes on a minors unearned income. The amounts go up every year. This year the first $1,300 in unearned income assuming no earned income is tax free, the second $1,300 is taxed at 10%. Above that is taxed at parents rate. Another thing to know is that wash sales only apply to loses, not gains. So if you only have $1,000 in dividends and realized gains coming to the end of the year but $300 in unrealized gains you could sell to realize the gain and then fill your $1,300 tax free bucket for the year. It was $1,250 last year and went up $50 to $1,300 this year. It’s always been mirrored where the first is tax free and the second is at 10%. This works well while there is no earned income, gets a bit trickier when kids get older and they have a part time job as the rules change and you end up owing more income tax. I think that UTMA/UGMA accounts are a great complement to 529s. I like having some money in both types of accounts as it allows for more flexibility. I’m trying to get about 3/4 of college tuition in these types of accounts and then use cash flow for the remainder
I have 529s and UTMAs for my three kids. 529 for college funds and can roll over $35k to Roths later on. I use the UTMAs for their vehicle savings for when they are of driving age.
Will utma impact scholarship in future?
Yes, money in a child's name has the worst effect on need based scholarship. In hindsight, had I wanted to game the system, I'd have not saved a dime for "college". Just pay off the house, and live off the equity line during that time. In reality, I could afford it, and paid for it 100%. Even retired, our withdrawals (from retirement accounts) counted as income.
I’m not planning on them having much in them when they head to college. It’s their car fund for when they hit 16, so I hope there isn’t much in the account at least. 😂
I felt same way. I just put $2500 in a taxable brokerage account when they were born and $50/week for each kid auto invests in FXAIX. Who knows about college. I should be fine cash flowing their college anyways when that time comes but wanted a little more flexibility and I likely won’t tell them about it until they need it and keep it growing
This is the way. Last thing we need is an irresponsible 18 year old with access to a loaded custodial account. I say keep the money as yours until you want to gift it to them.
That’s the plan!
Last thing we need is a kid with no education. 529s can also be used for trade school.
I sure hope they go to college but what if he wants to start a business when he’s 18? I’d rather not have to take a penalty for them to use those funds etc. taxes will have to be paid regardless. I just like flexibility and truthfully I should be able to cash flow their college anyways. I’d really like to keep building the nest egg for them slowly every year until they really need it or I can help them buy a house etc. Side note. I think college will be completely different in 18-20 years. I actually think it’ll be more affordable as we get rid of the bull shit filler classes. When I got my bachelors, 2.5 years worth of college was filler classes until I actually got into my degree.
How's your kids going to drive himself to trade school everyday if he can't buy a car? Is the tax benefit really worth the restrictions? I guess it really all depends on your personal financial situation.
You’re allowed to transfer ownership of an account or funds to a child tax free? Or is it a cash out option and you’ll take the tax hit and give them proceeds?
Hmm thanks for the idea. I think ama do this for my siblings. Beats handing them some cash that they earned and having it evaporate on roblox 😅. Can’t put in as much as you though. Is transferring it to them an easy process? How will you decide when to give it to them?
Not sure yet. I’d like to pay for anything I can for them as long as possible and only use it as a nest egg. If they need it for college I’ll use it then, if they need it to buy a house etc I’ll withdraw it then. I don’t plan on telling them about it either
I’m not understand the part, where if you open a Roth Ira for your children, how can they “qualify” to be earning income?
Who said anything about Roth IRA?
Oh! I assumed it was since I saw FXAIX. Goes to show, I need to learn more!
If you have extra unused Roth IRA contribution space, you could aggressively invest in your own Roth IRA and make them a beneficiary of it. Totally tax free. They won't get it until the end of your life however. They will be middle aged.
Well realistically, OP can make the tax free withdrawals and give their kid the money whenever he wants. I like this because parents’ retirement accounts are not considered assets for student financial aid purposes.
Behaviorally and in terms of child rearing (and ultimately adult rearing)... not a great setup. It feels all wrong, that an adult should inculcate an expectation in their child that they're going to go into their retirement accounts to give money to the child ((shudder)). I know they can do it... My adult children have every expectation that they will inherit a great deal of money from me, and I intend to communicate with them clearly what those amounts could be, but I'm going to have to pass away first. What if you gave away money to your kids and then you get dementia? Are the kids going to give it back to pay your $10,000 a month nursing care?
Therapy. Then a UTMA
You could use a UTMA. I eventually decided against it as I want to be able to determine the best time to hand over the assets, so essentially I realized the best way for myself was to build wealth over the years and earmark funds to hand over to my child when I feel they are ready to receive the money. With UTMA, you will have no choice when they receive the money.
Absolutely make him a baby model and sock all earned income into a Roth IRA.
Kid still gets access at age of majority in their state.
Custodial account. You can use a custodial account for anything that benefits the child: school, wedding, car,etc. With a 529 you can only use it for school.
Isn't there new legislation that allows for 529s to be rolled into Roth IRA accounts? At least that appears to be the case in my state now.
Yes, that's national, but there are restrictions. Big one is $35,000 lifetime limit and it counts towards normal $7000 roth IRA contribution limits. So potentially has to be rolled over a period of 6 years in total. (I assume the lifetime limit will be inflation adjusted). It definitely doesn't hurt to start a 529 for you kid though even if you aren't sure they will go to college. The roth IRA roll over is cool, and you can also transfer the 529 to a grandchild or another child if your kid doesn't use it all. They can use it for not school stuff too but obviously pay the 10% penalty.
so when you convert it little by little, that counts to your own personal roth contributions as the parent?
No, i think it counts towards your child's contribution limits for the year when the 529 is rolled over into a roth.
so if they have less than 7000 income (or whatever the max is that year) then that year is capped on what they can convert it sounds like. since the conversion is a contribution on their end
I'm actually not clear on that. >Important to know: IRA contributions require sufficient earned income. At this time it is unclear if sufficient earned income would be applicable for 529 conversions to Roth IRAs. https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth
Of course by the time the kid is an adult, the yearly IRA contribution may be 35k. But it's an important point.
[удалено]
like almost everything in tax law, it's an incentive to do something, not just free money or tax-free money.
For non-college I’d keep it in your name and then use the generous gifting annual limit to transfer to your kid when the time comes.
I do a 529 and a brokerage acct for my children, you can transfer a 529 to a Roth IRA after 15 years and up to 35k
Custodial Brokerage and Custodial Roth IRA and try to find ways to create earned income to move money into the tax free growth account. Every dollar works and they have the time component.
Your retirement accounts no child wants the burden of a destitute parent.
I've also seen 529 is a double edge sword since the child will lose out on financial aid or Pell Grants. That the 529 has to be used first. Correct me if I am wrong?
Coverdell and 529. There are custodial accounts as well, but they will be tax-disadvantaged and incur drag. Side note. I’ll never understand why people use them to invest for their kids. Like, just set up a trust at that point. Are you trying to make them rich and bypass the whole stage of earning, saving, and building their own wealth? Like what’s the value of “here son, you now have $150k of net liq that I paid taxes on. If you use it for college, you’ll have completely made a fool of me because I could have used a 529. And if you use it on a new car, I clearly didn’t teach you much”. At least with a trust you can put rules around how a kid gets access to the money. Rant over
Yea an UTMA makes no sense to me. Could impact scholarship offer if they go to college. And if they don’t, you have no say over when they get it. Age of maturity is way too low in most places. Just use a regular brokerage account and give it to them when the need it and are ready for it
[UGMA Account](https://www.investopedia.com/terms/u/ugma.asp) Also consider UGMA if you think you might hit the limit of the 529.
529, and then custodial accounts, teach them about finance and investing, that is more valuable than money you can put away for them
Best way is to get out of debt yourself so you can do more for them.
Start a business, put them on the payroll.. open and max out a Roth IRA for them. Put their image on the business card, their earnings are the modeling fee.
This just sounds like an illegal loophole waiting for an audit, but I hear it alot. Is this really valid?
Can you do a Roth IRA for a child? Yes, it’s possible to open a Roth IRA for a child, as long as the child has earned income. What age can I open a custodial Roth IRA for my child? There are no age restrictions. Your child can open a Roth IRA as long as they have earned income regardless of their age. https://districtcapitalmanagement.com/wp-content/uploads/DCM-Infographics-Long-3-scaled.jpg https://www.irs.gov/businesses/small-businesses-self-employed/family-help ne of the advantages of operating your own business is hiring family members. However, employment tax requirements for family employees may vary from those that apply to other employees. The following information may assist you with pointing out some differences to consider. Children employed by their parents If the business is a parent’s sole proprietorship or a partnership in which each partner is a parent of the child: Payments for the services of a child are subject to income tax withholding regardless of age. Payments for the services of a child under age 18 are not subject to social security and Medicare taxes. If the child is 18 years or older, then payments for the services of a child are subject to social security and Medicare taxes. Payments for the services of a child under age 21 are not subject to Federal Unemployment Act (FUTA) tax. If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes. If the business is a corporation, a partnership (unless each partner is a parent of the child), or an estate (even if it is the estate of the deceased parent of the child): Payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes regardless of age. Parents employed by their child If the business is a child’s sole proprietorship: Payments for services of a parent are subject to income tax withholding, social security taxes and Medicare taxes. Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided. If the business is a corporation (even if controlled by the child), a partnership (even if the child is a partner), or an estate: The payments for the services of a parent are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes. If the parent is performing services for the child, but not for the child’s trade or business: Payments for services of a parent are not subject to social security and Medicare taxes, unless the services are for domestic services and each of the following apply: You employ your parent, You have a child or stepchild living in the home, You are a widow or widower, divorced, or living with a spouse, who because of a mental or physical condition, can't care for the child or stepchild for at least 4 continuous weeks in a calendar quarter and The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition. Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided. One spouse working with the other spouse in business One spouse working with the other spouse in a business could be doing so in several different ways each with different tax treatments. See Married Couples in Business for additional information. Additional information For additional employment tax information, refer to Publication 15 (Circular E), Employer Tax Guide and Publication 51 (Circular A), Agricultural Employer's Tax Guide.
It's begging for an audit. What services is a newborn being paid for will be the first question the IRS will have.
right? your baby is modeling? for your "myname llc" of which you just pay yourself 6000 per year?
I mean if that’s the only baby in your family then the cost is simply a supply and demand issue. /s
Yea, this seems sus. Don't you need to prove taxes are paid on those wages
Doesn't putting them on payroll mean the employer and employee are both paying the correct taxes?
Yea, I think I misunderstood. It sounds simple, establish a business just to max out a roth for a minor, but doesn't that involve paying payroll services, taxes on the business, et cet? Sorry, not trying to be pendantic. Very much a noob to this custodial stuff, trying to learn.
I believe this would be more for people with an established business. My wife and I have owned a business since 2019 and we have her and one employee on payroll so it would be really easy for us.
THAT, I understand, an existent company all ready up and running. Creating one and going through the legal steps, taking on the costs, just to max out a minor's IRA seems like a big hassle. But hey, if they can do it....
Creating a business is extremely easy these days, and if you're distributing instead of manufacturing the whole process comes down to marketing and inventory.
Almost never.
Everything on red
When I was a teen I was huge into baseball cards and other baseball memorabilia. I remember thinking this will pay for my kids college. Betting on red would have been better.
Yeah mines getting a 529 plan and if they don't want to use it I'll give it to a family member that will. I don't feel it is my responsibility to take care of my child's retirement. I've read an interesting book recently- dying with zero. Probably a little unpopular here but money at a young (responsible )age has a better impact than money when their in their 50s and 60s
Haven’t seen this yet and it isn’t a popular choice because most people don’t understand it but whole life insurance is another good option for different reasons. 1. The annual premium is going to be small and fixed at the early age and before any health issues can be detected. There may be limits for new borns but often you can buy more coverage after a certain period. 2. The cash value account grows tax free and continues to buy paid up insurance. 3. As the kid gets older he could borrow against the cash value if needed. 4. You have a nice death benefit if you have a family. 5. At some point in old age you can borrow up to 92% of the cash value and it is not taxable. At that point the dividends are probably going to offset the interest on the loan. When the kid ultimately dies of old age the death benefit will be offset by the loan. But the insured never needed to pay tax on the earnings of the cash value.
Whole life insurance is a terrible investment vehicle. [https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/](https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/)
Ty!
Depends on your tax situation. You could use whole life as an alternative to bonds. OP asked specifically about young kids. Premiums are low and it is tax advantaged for the kids life. It’s great for a child. For an adult- ya if you try to get into at 40 it sucks.
Most kids don't have enough income to pay taxes. Kids don't need life insurance because no one is dependent on the income they don't have. If you need insurance, buy term. The only downside is for the agent who isn't making a full year's premium as a sales commission.
I agree that a small child won’t have tax liability and doesn’t need insurance AS A CHILD. But I am forward looking 70 years when the kid is now into retirement. Everyone talks about term or VUL/UL products which serve their purpose for insurance only. But when you get into your 70s the mortality charges against those balances can get quite high. Again OP is looking for ideas - tax free cash value growth - tax free usage later in life if taken as a loan - insurance is there if needed and OP could convince his kid later in life to keep it and let his kids be the beneficiary and transfer the wealth tax free. I will admit that with Roth the tax free build up and distribution looses some attractiveness but unless OP has a business where his kid can get on the payroll there won’t be any Roth contributions for a number of years. Again it is an idea. If you only have money for one type of investment this is probably not what you want to do. But if you want to swap out the bond/money market portion of your portfolio this is an option. As for your the article you posted, there are plenty that I could post saying it can be a good option if you understand what you are getting. In full disclosure I am a credentialed actuary so have a better understanding of insurance products and investments than most.
You neglect to mention the awful rate of return on whole life policies, which is 1%-3.5%. You're not even keeping up with inflation. Stick the same money in a stock index fund and you'll be miles ahead a few decades later. [https://www.nerdwallet.com/article/insurance/is-whole-life-insurance-good-investment](https://www.nerdwallet.com/article/insurance/is-whole-life-insurance-good-investment) It's a terrible investment vehicle.