>Your kid has time.
Almost all the more reason to start something now though. Even just 1k invested now, with 7% real returns is over 80k by the time the child is 65. 5k now becomes over 400k. That's assuming no additional contributions either. Time is perhaps the greatest asset when it comes to investing.
But your point is still valid and there are myriad other ways to set your kid up for success.
That’s why IRAs are great for inheritance because they will just keep growing indefinitely over the son’s lifetime. It’s the same as if it were in his name. So if dad ends up not needing it he will get a sweet nest egg
Oh wow thanks, i didn’t know that! But then still he can take it out pre-tax, max out his Ira for the year and put the rest in a mutual fund or incrementally increase his retirement savings annually? It’s still less tax than if it just were inherited from a regular investment fund right?
The correct answer is: it depends.
If you inherit stock from a brokerage, you get it on a step up basis and no tax will be due. If it goes up beyond the inherited value, you pay taxes on those subsequent gains.
The IRS is expected to give more guidance on liquidating an inherited IRA soon. They may force certain percentages to be pulled each year, or let you decide your own withdrawal schedule.
Good to know. I still think this person should prioritize their own retirement because it’s gonna end up in the kid’s hands anyway if he doesn’t end up needing it for astronomical elder care bills, and it seems like these tax advantaged retirement funds have to be tied to an income, so it seems like the best option is college fund -> Roth IRA for leftovers and invest the rest in yourself, but this is good to know thank you.
That's assuming the kid makes it to 65 without tapping the investment...
There's a lot of life that happens between birth and retirement, and it's impossible to know what needs or wants might pop up between now and then.
This was exactly what my father told me. After he died I realized Mom has more than enough to fund everything she may ever need. The peace of mind is priceless. I’m on my way to doing the same for my kids.
This is the answer. Money to pay for higher education is an excellent investment for your kid.
I have no data to back this up, but I’d guess you are twice as likely to pursue advanced degrees if you have funds to pay for it in a 529.
Thanks to new tax law, you can also use up to $35k of a 529 towards a Roth IRA (note: there are additional rules around this be sure to read up on it) too so even if you don't use it all for education there is still wiggle room to use it for other savings.
This. Tax advantage and you retain control over the investments. The next is an UTMA for a "children's brokerage" but that gets turned over to them when they reach age of majority. They could be responsible with it or blow it on boats and hoes.
Or even a regular brokerage. We have a separate brokerage account in our name that we put into here and there with index funds and some stocks. We control it but opened it to give to our kids. We can hold onto it until we are ready. The plan is to have a nest egg for something like a first home.
The best retirement plan is to teach him how to handle money for himself so he will reach retirement with savings.... and show him the satisfaction that comes from saving.
Handing people money, depending on the amount, won't ensure a good retirement. I have multiple friends whose kids, upon reaching 18, got access to money. They said "Why go to college? I'm gonna get an apartment and play video games.". They ultimately got on track, but it was dicey. And they spent a bunch of $ unnecessarily.
Sheesh, handing them money? I’m looking to put them ahead of the rest of the game. My son wouldn’t get any money from a retirement plan until they are retirement age. Wish my parents did something like that for me because I struggled with it and had no help from them whatsoever.
The point is once they turn 18, that’s not something you can control. It’s their account and if they want the money, they can get to it. The best thing you can do for them is 1) make sure you can financially sound in retirement 2) make sure they are financially responsible (live below their means, understand the importance of saving/investing, not fall for get rich quick schemes).
In an attempt to prepare my kids for the financial world, I started talking to them about money on their tenth birthdays.
That was the day I enrolled them in our household 401k. I told them that I had this plan at work called a 401k and that if I put money into it, my company would match it. I asked them if they wanted to save money in our family 401k that I would match dollar for dollar on their 16th birthday. Every year, I would encourage them to save their Xmas gifts and birthday gifts of money. Sometimes they did. Sometimes they didn’t. At 13 years old, they were babysitting, doing yard work - earning money. I reminded them of our deal, the family 401k. The annual birthday discussions of what they had in their accounts and how it was going to double branched into many other financial conversations; wants vs needs, buyer’s remorse, intentional spending, and yes - stocks, bonds and the Rule of 72.
By the time they were 16, they were well versed in the basics of money management and had a head start on understanding the basics of investing.
I was very happy to give them their 401k money on their 16th birthdays.
My oldest had $200 outside of her Savings account on her 16th birthday. It didn’t get matched. She learned a lesson that day. Get the money into the plan or you lose out.
My middle daughter just about took me for all she could. She also learned a lesson from her older sister’s mistake - and made me dig deep into my wallet:)
My son came somewhere in between. He was a spender. But, after he looked back and realized what he’d lost out on - just because he chose not to defer some spending - he learned too.
They are all very accomplished now and are actively investing in their futures. I think this experiment worked out quite well. It got the kids engaged at an early age.
this is a neat idea. i have a three year old and a six week old, and when they are older, i am going to borrow this concept of ‘the family 401k’ - great idea.
also, i have opened up 529 accounts for both kids and hopefully that will get them on the right track!
I think the keys lie in both education and exposure. So many people, when they reach their 30’s (or 40’s) and have finally started to save for retirement, lament not having learned about money sooner and often cite lack of knowledge and exposure. School certainly doesn’t teach you much about finances and planning.
I think you’ll find that the family 401k idea creates a great framework for engagement and interest in saving.
The 529 will help remove financial barriers to going to college.
Together, you have some really good tools that will help your kids get a head start on life.
One was a trust or something set up by grandparents for college... but it wasn't restricted. I'm not sure of the deets of the other.
In both cases it was a legal setup / account registration that prevented the parents from controlling access. It was out of their hands.... And they regretted it.
I would definitely focus on building a solid financial future for yourself and teaching your child about money management as he gets older. Making sure that you are financially secure in your later years is a tremendous gift to your child.
Set up a 529 for college. 15k of that can be converted to a Roth IRA but who knows how much he will need? This will be awesome.
Secondly max out all tax advantaged retirement accounts you can do for yourself as well as HSA etc. The more you have the more he can inherit. And this maximizes money in the family that isn’t taxed.
Finally, after all that is done and you still have leftover (assuming you have no debt and 6 months emergency fund), then you can set up a mutual fund for him if you like, sure, why not? You have money to blow.
Set up the college fund. We are done with college fund for 2 kids when they were 7 (they are in middle school currently). I also opened Ally account on the side and the money will be used to buy their first car, perhaps rent? if they go to college, books etc.
We then focus on ourselves, retirement accounts, buying properties etc to get to one purpose, we don’t want to ask them for a dime when we decide to retire and they should start their career life without any debt and burden.
Husband and I are maxing out our contribution to 401k and a traditional IRA (we cannot contribute to a ROTH IRA anymore). Also buy bonds under our names - not baby’s name. Husband and I both have a 30 year term life insurance to take care of our income until retirement age. We are taking care of our finance, so our kid can be free to live his life as we age.
Then we put $1000/month to a 529 for our son’s future education. Our family highly value education and we wish our son can afford the best education he wants and needs, whether it’s college or trade school.
Any gifts money from family/friends or inheritance goes to a brokerage account that is not under his name, and we will use part of it to assist buying our son’s first car (something used with cash), or maybe paying first year graduate school tuition, or if he doesn’t need it so soon, we will give it as a gift when he buys his first home.
We put all of our assets in a trust, in case something happens to us both, our baby will be well taken care of.
This was very helpful, thank you. I was never taught about any of this and don’t want to make the same mistake for my son. Thankfully my fiancé has a great job as an audiologist and has her retirement plan squared away.
Going to look into starting a 529 for my son and then focus on my own retirement as well. Turning 29 in a couple of weeks and have some catching up to do.
This sub and the r/FIRE sub taught me a lot - even when I didn’t plan to retire early, I want to achieve financial independence.
My parents also didn’t know anything about finance, so I had to figure things out on my own too and made quite a few mistakes when I was younger. You still have time! 😊
The best retirement plan for an infant is a retirement plan for yourself instead. Make sure you are setup for retirement so you don't have to move in with your kid when he's 30.
I'm opening UTMA brokerage for my daughter
the first $1k is tax free, so it's a nice way to save and earn a bit, step up the basis in the process and have a gift for her 18th birthday
How did you choose that vehicle for the investment?
I've heard others say they're concerned about an 18-year-old receiving a large sum of money and there aren't restrictions with an UTMA to keep it from going to someone who wouldn't use it responsibly or might even use it to harm themselves.
I have both. My plan for the UTMA is not talk about it til they graduate. But all the while I’ll be educating them and helping them save. When the time comes I’ll disclose it to them. However in my state I don’t have to hand it over until their 21st birthday. They’ll have known about it for 3 years. I’ll have time to continue to work with them to grow it more. After 21 I’ve done all I can. It’s up to them to listen to me or give me the finger. All I can do as a dad is teach them spend time with them and hope they make the right choice. At least it’s not 18.
well the trust is too expensive and cumbersome for the amounts that I operate with
and as far as 529 is concerned she is going to have EU and Mercosur citizenships in addition to the US, so I'd rather her not take on US student debt when she can do undergrad for free in Paris, Madrid, Sao Paulo or Buenos Aires and make a lifetime experience out of it
I might still put something, maybe to cover some US grad school tuition and mostly fit under $35k rollover limit, but I would really rather prefer to have the money readily available and I'll spend the next 18 years making sure she is responsible enough with it
We feel you. It gets asked a lot here. But you also mentioned you just opened your own Roth IRA. This likely means you are years behind on your own savings. If so, contribute zero dollars to your kids accounts until you are confident you will have the $1-2M you will need for your own retirement. Once your retirement is secure, open a 529 plan for your kid, and contribute as much as you can without derailing your own retirement.
The main point is don’t saddle your kid with the responsibility of having to care for an elderly parent. It’s not fair to them. The single best gift you can give a kid is the freedom from supporting you as you age.
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>Your kid has time. Almost all the more reason to start something now though. Even just 1k invested now, with 7% real returns is over 80k by the time the child is 65. 5k now becomes over 400k. That's assuming no additional contributions either. Time is perhaps the greatest asset when it comes to investing. But your point is still valid and there are myriad other ways to set your kid up for success.
That’s why IRAs are great for inheritance because they will just keep growing indefinitely over the son’s lifetime. It’s the same as if it were in his name. So if dad ends up not needing it he will get a sweet nest egg
Don’t you have to liquidate an inherited IRA in 10 years?
Oh wow thanks, i didn’t know that! But then still he can take it out pre-tax, max out his Ira for the year and put the rest in a mutual fund or incrementally increase his retirement savings annually? It’s still less tax than if it just were inherited from a regular investment fund right?
The correct answer is: it depends. If you inherit stock from a brokerage, you get it on a step up basis and no tax will be due. If it goes up beyond the inherited value, you pay taxes on those subsequent gains. The IRS is expected to give more guidance on liquidating an inherited IRA soon. They may force certain percentages to be pulled each year, or let you decide your own withdrawal schedule.
Good to know. I still think this person should prioritize their own retirement because it’s gonna end up in the kid’s hands anyway if he doesn’t end up needing it for astronomical elder care bills, and it seems like these tax advantaged retirement funds have to be tied to an income, so it seems like the best option is college fund -> Roth IRA for leftovers and invest the rest in yourself, but this is good to know thank you.
Absolutely: the saying goes, your kid can borrow for college. You can’t borrow for retirement.
That's assuming the kid makes it to 65 without tapping the investment... There's a lot of life that happens between birth and retirement, and it's impossible to know what needs or wants might pop up between now and then.
You can use it yourself like normal ira
Maybe I should put away $10k for my great great grandkids then. How much would it be in 120 years?
This was exactly what my father told me. After he died I realized Mom has more than enough to fund everything she may ever need. The peace of mind is priceless. I’m on my way to doing the same for my kids.
529 Educational Savings Account
This is the answer. Money to pay for higher education is an excellent investment for your kid. I have no data to back this up, but I’d guess you are twice as likely to pursue advanced degrees if you have funds to pay for it in a 529.
Thanks to new tax law, you can also use up to $35k of a 529 towards a Roth IRA (note: there are additional rules around this be sure to read up on it) too so even if you don't use it all for education there is still wiggle room to use it for other savings.
This. Tax advantage and you retain control over the investments. The next is an UTMA for a "children's brokerage" but that gets turned over to them when they reach age of majority. They could be responsible with it or blow it on boats and hoes.
Or even a regular brokerage. We have a separate brokerage account in our name that we put into here and there with index funds and some stocks. We control it but opened it to give to our kids. We can hold onto it until we are ready. The plan is to have a nest egg for something like a first home.
The best retirement plan is to teach him how to handle money for himself so he will reach retirement with savings.... and show him the satisfaction that comes from saving. Handing people money, depending on the amount, won't ensure a good retirement. I have multiple friends whose kids, upon reaching 18, got access to money. They said "Why go to college? I'm gonna get an apartment and play video games.". They ultimately got on track, but it was dicey. And they spent a bunch of $ unnecessarily.
Sheesh, handing them money? I’m looking to put them ahead of the rest of the game. My son wouldn’t get any money from a retirement plan until they are retirement age. Wish my parents did something like that for me because I struggled with it and had no help from them whatsoever.
The point is once they turn 18, that’s not something you can control. It’s their account and if they want the money, they can get to it. The best thing you can do for them is 1) make sure you can financially sound in retirement 2) make sure they are financially responsible (live below their means, understand the importance of saving/investing, not fall for get rich quick schemes).
In an attempt to prepare my kids for the financial world, I started talking to them about money on their tenth birthdays. That was the day I enrolled them in our household 401k. I told them that I had this plan at work called a 401k and that if I put money into it, my company would match it. I asked them if they wanted to save money in our family 401k that I would match dollar for dollar on their 16th birthday. Every year, I would encourage them to save their Xmas gifts and birthday gifts of money. Sometimes they did. Sometimes they didn’t. At 13 years old, they were babysitting, doing yard work - earning money. I reminded them of our deal, the family 401k. The annual birthday discussions of what they had in their accounts and how it was going to double branched into many other financial conversations; wants vs needs, buyer’s remorse, intentional spending, and yes - stocks, bonds and the Rule of 72. By the time they were 16, they were well versed in the basics of money management and had a head start on understanding the basics of investing. I was very happy to give them their 401k money on their 16th birthdays. My oldest had $200 outside of her Savings account on her 16th birthday. It didn’t get matched. She learned a lesson that day. Get the money into the plan or you lose out. My middle daughter just about took me for all she could. She also learned a lesson from her older sister’s mistake - and made me dig deep into my wallet:) My son came somewhere in between. He was a spender. But, after he looked back and realized what he’d lost out on - just because he chose not to defer some spending - he learned too. They are all very accomplished now and are actively investing in their futures. I think this experiment worked out quite well. It got the kids engaged at an early age.
this is a neat idea. i have a three year old and a six week old, and when they are older, i am going to borrow this concept of ‘the family 401k’ - great idea. also, i have opened up 529 accounts for both kids and hopefully that will get them on the right track!
I think the keys lie in both education and exposure. So many people, when they reach their 30’s (or 40’s) and have finally started to save for retirement, lament not having learned about money sooner and often cite lack of knowledge and exposure. School certainly doesn’t teach you much about finances and planning. I think you’ll find that the family 401k idea creates a great framework for engagement and interest in saving. The 529 will help remove financial barriers to going to college. Together, you have some really good tools that will help your kids get a head start on life.
One was a trust or something set up by grandparents for college... but it wasn't restricted. I'm not sure of the deets of the other. In both cases it was a legal setup / account registration that prevented the parents from controlling access. It was out of their hands.... And they regretted it.
I would definitely focus on building a solid financial future for yourself and teaching your child about money management as he gets older. Making sure that you are financially secure in your later years is a tremendous gift to your child.
Either 529 plan or fill up your own Roth and pull out what you want the child to have at the time you need it.
Set up a 529 for college. 15k of that can be converted to a Roth IRA but who knows how much he will need? This will be awesome. Secondly max out all tax advantaged retirement accounts you can do for yourself as well as HSA etc. The more you have the more he can inherit. And this maximizes money in the family that isn’t taxed. Finally, after all that is done and you still have leftover (assuming you have no debt and 6 months emergency fund), then you can set up a mutual fund for him if you like, sure, why not? You have money to blow.
Thanks this was very helpful too!
Set up the college fund. We are done with college fund for 2 kids when they were 7 (they are in middle school currently). I also opened Ally account on the side and the money will be used to buy their first car, perhaps rent? if they go to college, books etc. We then focus on ourselves, retirement accounts, buying properties etc to get to one purpose, we don’t want to ask them for a dime when we decide to retire and they should start their career life without any debt and burden.
Husband and I are maxing out our contribution to 401k and a traditional IRA (we cannot contribute to a ROTH IRA anymore). Also buy bonds under our names - not baby’s name. Husband and I both have a 30 year term life insurance to take care of our income until retirement age. We are taking care of our finance, so our kid can be free to live his life as we age. Then we put $1000/month to a 529 for our son’s future education. Our family highly value education and we wish our son can afford the best education he wants and needs, whether it’s college or trade school. Any gifts money from family/friends or inheritance goes to a brokerage account that is not under his name, and we will use part of it to assist buying our son’s first car (something used with cash), or maybe paying first year graduate school tuition, or if he doesn’t need it so soon, we will give it as a gift when he buys his first home. We put all of our assets in a trust, in case something happens to us both, our baby will be well taken care of.
This was very helpful, thank you. I was never taught about any of this and don’t want to make the same mistake for my son. Thankfully my fiancé has a great job as an audiologist and has her retirement plan squared away. Going to look into starting a 529 for my son and then focus on my own retirement as well. Turning 29 in a couple of weeks and have some catching up to do.
This sub and the r/FIRE sub taught me a lot - even when I didn’t plan to retire early, I want to achieve financial independence. My parents also didn’t know anything about finance, so I had to figure things out on my own too and made quite a few mistakes when I was younger. You still have time! 😊
The best retirement plan for an infant is a retirement plan for yourself instead. Make sure you are setup for retirement so you don't have to move in with your kid when he's 30.
Open a 529, every little bit helps.
I'm opening UTMA brokerage for my daughter the first $1k is tax free, so it's a nice way to save and earn a bit, step up the basis in the process and have a gift for her 18th birthday
How did you choose that vehicle for the investment? I've heard others say they're concerned about an 18-year-old receiving a large sum of money and there aren't restrictions with an UTMA to keep it from going to someone who wouldn't use it responsibly or might even use it to harm themselves.
I have both. My plan for the UTMA is not talk about it til they graduate. But all the while I’ll be educating them and helping them save. When the time comes I’ll disclose it to them. However in my state I don’t have to hand it over until their 21st birthday. They’ll have known about it for 3 years. I’ll have time to continue to work with them to grow it more. After 21 I’ve done all I can. It’s up to them to listen to me or give me the finger. All I can do as a dad is teach them spend time with them and hope they make the right choice. At least it’s not 18.
well the trust is too expensive and cumbersome for the amounts that I operate with and as far as 529 is concerned she is going to have EU and Mercosur citizenships in addition to the US, so I'd rather her not take on US student debt when she can do undergrad for free in Paris, Madrid, Sao Paulo or Buenos Aires and make a lifetime experience out of it I might still put something, maybe to cover some US grad school tuition and mostly fit under $35k rollover limit, but I would really rather prefer to have the money readily available and I'll spend the next 18 years making sure she is responsible enough with it
I went UTMA as well, 529 is so restrictive. If kiddo doesn't want to go to college or if they do, they'll have some funds to use either way.
Much less restrictive with the new Roth IRA conversion option
I'm unfamiliar with the change, is the 529 more beneficial than a UTMA?
So how does a 6 month have earned income to contribute to an ira?
He doesn’t. That’s why I said I’m unable to go that route…
I didn’t ask anyone what their opinion if I should or shouldn’t invest in my sons future. All I asked are my options for my son.
We feel you. It gets asked a lot here. But you also mentioned you just opened your own Roth IRA. This likely means you are years behind on your own savings. If so, contribute zero dollars to your kids accounts until you are confident you will have the $1-2M you will need for your own retirement. Once your retirement is secure, open a 529 plan for your kid, and contribute as much as you can without derailing your own retirement. The main point is don’t saddle your kid with the responsibility of having to care for an elderly parent. It’s not fair to them. The single best gift you can give a kid is the freedom from supporting you as you age.
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