I''ll preface this by saying I'm a novice when it comes to finance. I do the basics, max out my roth and fund 5% and 6% accounts with emergency fund money, but I don't know very much. I'm looking to start some type of retirement account for the kids for when they're older and/or we're gone, but am not sure of the best options available? Any suggestions where to start looking?
savings and brokerage accounts for kids?
- Thread starter sound48
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How old are the kids?
Retirement and brokerage suggests real money, not just a nominal amount to teach savings / investing.
I have debated that when my kids start to work I might open a Roth IRA in their names and fund it or partially fund it. The thing is, one needs earned income to contribute anything into an IRA (except spousal IRAs).
The trouble with your kids earning investment income is that you then have to delve into the "kiddie tax" topic which is a set of rules designed to prevent highly taxed persons leveraging their children's standard deductions and tax brackets to arbitrage the family taxes. Its not hard per se, just limits.
I have just held my primary school age kids account's in my own name. They each have two, long term (they get it at 18, no strings) and general savings (accessible anytime). They get small allowances split between the two (with a bit paid weekly to my wife's church also). Birthday/special event checks generally go to the long term account.
Retirement and brokerage suggests real money, not just a nominal amount to teach savings / investing.
I have debated that when my kids start to work I might open a Roth IRA in their names and fund it or partially fund it. The thing is, one needs earned income to contribute anything into an IRA (except spousal IRAs).
The trouble with your kids earning investment income is that you then have to delve into the "kiddie tax" topic which is a set of rules designed to prevent highly taxed persons leveraging their children's standard deductions and tax brackets to arbitrage the family taxes. Its not hard per se, just limits.
I have just held my primary school age kids account's in my own name. They each have two, long term (they get it at 18, no strings) and general savings (accessible anytime). They get small allowances split between the two (with a bit paid weekly to my wife's church also). Birthday/special event checks generally go to the long term account.
There's a bill right now that is pushing for a Roth for minors, which would be ideal. At this time, IRA contributions must come from earned income, with the exception of the spouse. That means that many minors cannot contribute, and you can't fund one for them. If the bill passes, that changes.
Until that passes (if it does) your options are guardian accounts. For regular banking/savings you should be able to create co-signed/dual accounts. For broader assets you may need to look at UGMA and UTMA accounts. These two account types are both custodial accounts, where someone manages the money for the child until they come of age, and then the child takes decision making power.
Note that the gifts are irrevocable.
A 529 plan may be an option, but that does focus the assets on being used for college. A 529 is counted as a Parental Asset rather than a Student Asset, which is more favorable per the above.
Until that passes (if it does) your options are guardian accounts. For regular banking/savings you should be able to create co-signed/dual accounts. For broader assets you may need to look at UGMA and UTMA accounts. These two account types are both custodial accounts, where someone manages the money for the child until they come of age, and then the child takes decision making power.
Note that the gifts are irrevocable.
- UTMA allow more complex assets (including real estate) to be owned.
- UGMA age of majority is 18, UTMA can be up to 25.
- You can't tell the kid what to do with the cash - when they hit age of majority it is for them to decide. It means that they may spend it on whatever they wish once of age.
- The funds if invested will create 'unearned income' this triggers the Kiddie Tax once the level reaches a certain point. First $1050 is exempt, the second $1050 is taxed at child rate (10%) and any more than this is charged at the parents rate.
- Both accounts are considered assets in the name of the child for FinAid - this will really make a difference to their ability to claim a needs based grant or scholarship. Child owned assets are much more aggressively weighted compared to parental assets.
A 529 plan may be an option, but that does focus the assets on being used for college. A 529 is counted as a Parental Asset rather than a Student Asset, which is more favorable per the above.
They are 8 and 14. I did a little reading as well and read about the custodial accounts. I'm not sure how I'd feel about them having complete access to money so soon though. Especially, considering the older one would have access somewhat soon. I'd rather something so they could have money when they're more financially responsible or when we're gone. I could try and open up savings accounts collecting 5 or 6% but those have a cap as well. And it also has a fixed earning rate vs more room for return in a brokerage account.
Thank you for all the info. Both your responses are very helpful getting started. A roth for minors would be perfect for what I'm looking for but sounds like it could be awhile if it ever happens. A roth as passable to the child could be an option if it came down to it. My girlfriend has yet to start a roth, could always start it for that purpose.
If your 14 year old earns any income in the next few years, you could match it with a Roth contribution.
I've often thought of ways to contribute to a Roth for my minor children. Child-labor laws and self-employment taxes are the main impediments to "creating" earned income around the house. To avoid these I've thought that our toddler daughter could model for a side business of mine (i.e. smile on the business card) and we could pay her/contribute to her Roth IRA $400 (the maximum earnings before self-employment taxes start) per year. I haven't yet received the requisite approval to move forward.
I've often thought of ways to contribute to a Roth for my minor children. Child-labor laws and self-employment taxes are the main impediments to "creating" earned income around the house. To avoid these I've thought that our toddler daughter could model for a side business of mine (i.e. smile on the business card) and we could pay her/contribute to her Roth IRA $400 (the maximum earnings before self-employment taxes start) per year. I haven't yet received the requisite approval to move forward.
Taking the notion further, it may be a good idea to not just match, but to match if the child saves, so you incentivize and teach saving, rather than just gifting. EG for every dollar they earn and save into savings, you will match into Roth.
curtis1120
New Member
My parents helped me open a ROTH IRA at age 16 with money I earned at a summer job. They matched my entire earned income for the summer. My parents were great with financial education so this wasn't the introduction to investing or saving but an additional way to prepare for my future. It made some of my high school math classes more fun because there were lots of examples of compound interest and I knew that it wasn't just theoretical for me. It is now decades later and I'm so grateful for that start.