Submitted by yourgoldenstars t3_yiqiu0 in personalfinance
My daughter is now in preschool and I get anxious thinking about saving for her. Right now I can put 2k into savings/investment for her but I don't know what the best place would be to put that money. Where to start? Within the year I should be able to consistently start putting away more money for her.
I'm sorry if this is in the wiki, I checked and nothing caught my eye on savings for children.
BouncyEgg t1_iuk039p wrote
Have you already hit the max or on track to hit the max on all of your available tax advantaged space?
Have you read the Prime Directive? Have you seen the Flow Chart?
Your response to another commenter is concerning...
> But I'm not sure I understand it correctly. When I read this I think "Well the money isn't going to sit for 100 years. And a 6% interest gain after 100 years seems pretty bad." I don't know much about investing, am I reading this wrong?
The misunderstanding is not 6% appreciation in TOTAL across the 100 years.
It's an expected 5-10% (about 6-7% on average) per year over multiple years. As in, you might be up/down from year to year, but over the long term (ie decades), you expect to have an annual rate of return ~7%.
If this was misunderstood, I want to make sure you, yourself, have your own retirement well squared away. If this concept was holding you back from investing for your retirement, get your retirement well funded first, before you consider giving away money to your children.
Once you've taken care of yourself...
u/billthecatt has arguably the best answer to this question linked and pasted below:
Typical kid options:
529 - Great for college/education, but not all kids go to college/private schools, etc. More Details here: https://old.reddit.com/r/personalfinance/comments/mq0rjb/information_about_college_529_savings_plans/
UTMA (Custodial) - Invest on behalf of the child, Pros - lower taxes (assuming amounts don't get too high, see below), fewer restrictions on usage than 529. Cons - Is the child's money, so no takebacks. Minor takes full control at the age of termination (varies by state, typically 18 to 21). Also, will reduce/impact financial aid for college. You should tax gain harvest this type of account (realize gains periodically, while in the 0% tax bracket).
IRA (Roth/Traditional-Custodial) - Cons: Requires earned income, which most minors don't have or have much of.
Normal investment account in your name - Cons: Probably higher taxes than UTMA, Pros - you keep control
HYSA - Pros: Won't "lose" nominal value, low risk Cons: May lose out to inflation.
CD - Pros: Like HYSA, but with guaranteed returns over investment period. Cons: May lose out to inflation.
I-Bonds: Currently high-yielding bonds that can be purchased in accounts for minors: (up to $10k/year; interest changes every 6 months) /r/personalfinance/comments/qprqpy/ibond_questions_answered/
The first 4 options (529, UTMA, IRA, investment account) are account types that allow for investing based on your time horizon. If your child is young, a more aggressive investment mix may make sense for you (Stock ETFs/funds), and you may want to shift to a more conservative mix over time, depending on your goals for your child(ren).
More information:
UTMA Kiddie Tax Info: https://www.marketwatch.com/story/the-kiddie-tax-is-getting-easier-and-maybe-cheaper-under-the-new-tax-law-2018-05-24
UTMA Taxes: In general, in 2020 the first $1,100 worth of a child's unearned income is tax-free. The next $1,100 is taxed at the child's income tax rate for 2020. Anything above $2,200, however, is taxed at the marginal tax rate of the parent(s), which usually is higher than the child's rate.
Overfunding a 529 isn't so bad: /r/financialindependence/comments/hqexle/oversaving_in_a_529_is_a_much_smaller_problem/