PA 529 or HYS account?

Submitted by Trashmark t3_100245w in personalfinance

I am currently putting money each pay in to a savings account for my son, but the interest is minimal. Should I put this into a PA 529 or a high yield savings account? This money will be for him later in life naturally.

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BouncyEgg t1_j2f0a96 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?

Once you've done all that...

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/

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Trashmark OP t1_j2fctfx wrote

I will take a look at all of these links. Thank you for such an in-depth reply

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wolf8sheep t1_j2f13np wrote

529

Studies have shown that higher education; whether it is university, community, or tech/trade, the degree increases gross income. On top of which if they have a 529 he is 3-4x more likely to pursue a degree.

On top of which the new provision for 529’s allows up to 35k to be converted to a roth for retirement should he have funds left over or not pursue a degree.

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eckliptic t1_j2f4aae wrote

Almost anything is better than just sitting in a savings account

529 is the clear answer here for the major tax advantages unless you think he’s very unlikely to have education expenses

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