[quote=UCGal]There’s a lot of talk about this on both earlyretirement.org and bogleheads.com.
For folks with extra bandwidth in their savings – it’s a good way to start transferring their wealth ahead of time. .[/quote]
There are a lot of different chains of thought on this. I guess there are advantages and disadvantages of the various options.
We opted to set up a custodial account (UTMA) for both of our kids at birth. You can legally gift tax free $13,000 a year if you’re single or $26,000 a year per child if you’re married.
I easily set up an account for each of them in a Custodial account where I manage it. I’m not as conservative in it since they have a long time horizon but not too aggressive either.
My strategy has mostly consisted of buying stocks and selling covered call options on the stock each month. Fairly conservative play which has generated great returns. (Both of them have been averaging over 13% a year for the past 4 years).
The true power of compound interest is amazing. Fun to chart out on a spreadsheet from age 1 to 21. I figure every parent should be taking advantage of the power of compound interest if they can.
The proceeds are going to be used for college and grad school if applicable. At the rate they are going, they probably both should have very significant balances by the time they are graduating high school.
Something appealing to me when setting it up was that the parent can determine how to invest the funds and when to spend it on the child. You can pull out funds as long as it’s being spent on the child that owns the account. (We’ve never pulled out funds from their account and don’t plan to but I liked that aspect in case we needed to for any reason).
I figure that when they turn 16, they will get a nice car and it will be funded by their funds in their accounts. If they get a full academic scholarship (which is every parent’s dream) I’ll encourage them to use the funds to purchase their first house.
I have friends that were in this position and their kids got a full ride and they used the funds (with their kids consent) to purchase an apartment in the city where they were going to University so they lived rent free the 4 years they were in School). It worked out beautifully and turned out to be a great investment to boot.
On the serious downside is my kids from the time they were born have had to fill out tax returns each year! That isn’t fun. They have been generating good returns so they have had to pay taxes each year since they were born.
Also, once they turn 21 the funds are theirs. We don’t plan to tell them about the funds until they are older. I believe California also allows the transfer to be delayed until as late as 25 years old if you structure it properly.
Of course you have the possibility that your kids could end up as serious losers and squander the money but I am a glass is half full type of guy and hope for the best case scenario with my kids.
I’m sure many disadvantages and advantages can be given for all the various structures (529, Coverdell ESA, Custodial, etc).
[quote=carlsbadworker]I would. But my kids are too young for anyone to believe that they have earned income. They need to at least start potty training first.[/quote]
Exactly! A Roth IRA for them was impossible as they are only 4 and 3 years old and no way to justify income until they are probably in their early teens.
And some of the “salaries” for jobs that people are mentioning would probably be questionable by the IRS if an audit came up. I didn’t want to have to worry about those hassles.
