Hey there:
I’m looking for ideas on the best way to spend 1k for a new child. I’ve got a 529 setup already. I could put it in there. But I was thinking about opening an IRA for their future retirement. I’ve read that investing 1k now, especially when prices are low’ish, would result in a nice chunk at retirement. I’d love to open a Roth but they are too young to work and I don’t want to fake a job for them to open an account.
I don’t have credit card debt. I have a mortgage and student loan but both payments are manageable. 2.85% rate on the mortgage on 320k and 2.65% on 27k on the student loan. No car payments but a ‘new’ used car is in the next year or two. I have insurance policies in place (term life, ltc, long term dis, cancer policy).
Thanks
“and I don’t want to fake a job for them to open an account.” - yes… that would be tax fraud.
In my experience, don’t put it into a Custodial Uniform Gift to Minors Account (UGMA), that counts heavily on the FAFSA form as Student assets. There is also a Coverdell Educational Savings account, you can use for K-12 purposes as well as college… “If the Coverdell ESA is owned by a grandparent or other third party, it is not reported as an asset on the FAFSA, but any distributions are reported as untaxed income to the beneficiary on the subsequent year’s FAFSA.”
You could just open a regular brokerage account, put in tax-efficient investments, mentally earmark it for the kids, put them as the beneficiaries, in case you get hit by a bus.
If you don’t have a Roth yourself, you could open one for you or your spouse could too, make the kids the beneficiaries in case you get hit by a bus, and when you turn 59.5 you could withdraw tax and penalty free and start distributing money to the kids but stay below gift tax levels for any given year. Plus it gives you optionality… what if your kids don’t turn out well? I’m serious… I’m a parent of two, one is great, the other we’ve struggled with. If they don’t deserve the treasure chest, keep it! Or, maybe you need it more than they do in you near retirement. Life is 100% unpredictable.
Ha! I’ll look both ways before I cross! yeah I’ve read about people opening a roth for their child saying they were ‘baby models.’ Just seems like a lot of work and a bad idea to lie.
Thank you for the good/legal ideas.
Have you already maxed your own Roth IRA, your spouse’s Roth IRA, and any 401k or similar plans available to you? Have you maxed your HSA, if you are eligible? If not, do those things. The best financial gift you can give your kid is not having to support you when she’s in her 20s or 30s. Also, money is fungible, so you are more than welcome to consider $1,000 in any of your own accounts as “your kid’s” money. It will just legally be yours.
He’d need earned income for you to contribute to an ira.
I’d put it in the 529. In the new tax laws you’re allowed to transfer up to $35,000 from a 529 into a Roth — so if you end up over saving it can act as a conduit.
Utmas are another option but they count as a student asset in college financial aid calculations and could become a big problem.
Honestly, youre better off first paying off all of your own debt first.
1-Make sure you are saving enough for retirement. Depending on your income and expenses, your savings might range from 10-20% of income.
2-Whether to pay down debt or invest can be a gray area particularly when the debt has low interest rate as in your situation. Remember that future market returns are unknown. We differ in our comfort with debt. I favor paying down mortgage debt.
3-Once you are saving enough for your retirement and have a plan to pay down debt, then start saving for your child with a 529 account.
4- Is your cancer policy good risk maaagement?
“we differ in our comfort with debt”- I mean individuals in general differ …