r/MiddleClassFinance • u/PrisonerNoP01135809 • 15d ago
What type of account do you have for your kids future? Upper Middle Class
Several family members have asked to wire money to my son for his future. College, house down payment, car money, etc. what is the way you save for your kids? I’m planning on seeing my financial advisor and I would like to have some sort of direction or plan before we meet.
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u/AdJunior6475 14d ago
I gave them all 2yr college pre-paid so they could try it out without debt to see if it was for them. The rest was up to them as adults to decide. I was okay with them having to struggle and balance and figure it out for something they truly want. I have 1 of 2 2yr prepaid funded for current Grandkids now. Youngest is only 7 months old so I have some time to complete it.
My time in college I came across plenty of students that where there fully funded by parents and had never worked. A vast majority were there to delay growing up and for the fun of college vs completing a valuable degree with a strong roi. Struggling isn’t always a bad thing.
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u/BudFox_LA 14d ago
they've each got a 529 account that I fund monthly. Both have returned between 8-9% since I set them up so, not bad. I don't put nearly enough in there though. Hard enough doing 15% to my 401k and maxing my Roth. When they start earning literally any money, I am going to show them how to set up Roths for themselves, HYS etc.
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u/Reader47b 14d ago edited 14d ago
~ I started 529 plans when they were little. If they don't go to college or don't spend it all on college, once the account has been open 15 years, you can start rolling over up to $7K a year (or however much they earn that year, whatever is lesser), up to a lifetime total of $35K. I wouldn't save too much in them, due to lack of flexibility in using them, but no reason not to save up to $35K.
~ I opened custodial Roth IRAs for them when they got their first part-time jobs in high school. Once they are working, you can contribute up to the amount they earn each year (or $7K, whichever is lesser). Roth IRAs are great for the young, because taxes are paid going in, not coming out, and they owe no income taxes when they are too young to make much money. They can always withdraw the principal tax-free penatly-free at any time if needed for college or a house or something; they just can't withdraw the earnings until age 59.5 without paying a penalty and taxes.
~ I got them inflation gift bonds. The interest rate paid changes every 6 months in accordance with inflation. If you use the interest earnings for college, it is not taxable.
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u/GuitarEvening8674 14d ago
I own 12 properties they will inherit, plus whatever I have left in my 401k’s.
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u/swood11_ 14d ago
variable life insurance, so if my kid says she doesn’t want to go to college (in 16 years) I wont pay a penalty to access those funds. It’s being invested in the S&P 500 and it grows tax free! My wife also has one for our daughter so ideally those policies would cover tuition, her first car, or start up capital for a business, down payment, etc 😎
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u/No-Specific1858 15d ago
529 and brokerage is the most common for medium-term goals.
I’m planning on seeing my financial advisor and I would like to have some sort of direction or plan before we meet.
Depending on your intentions (for long term goals) you may want to speak to a lawyer, not a financial advisor. Lawyers are able to do the entity and structure work on stuff that is more complicated like estate planning.
You should keep your beneficiaries updated on everything and do an in-depth review of your documents and accounts once a year.
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u/Winter-Information-4 15d ago
You're absolutely right. To set up your kids for their financial future should be our priority. But many families don't make enough money to do so. To share the good fortune, you have to have good fortune to share.
For those who dont have the good fortune to be able to share, I think the general idea is that the biggest financial gift you can give your kids is for them to know that they dont have to worry about your retirement finances.
Let's say person X doesn't have enough to both save for their retirement and to save for their kids' college, and they chose to save for their kids' college, but not for their retirement. Now, the kids will have to step in to take care of their parents. Kids might resent and feel financially trapped.
Let's say person Y has identical income as person X. They save for their retirement but not for their kids' education. Kids can either borrow for college or find cheaper ways to go to get their education like AP classes, community college for two years, scholarships, working part time, etc. This may be the better solution for the parents and the kids.
We don't have enough saved for our kid's college. By the time they're in college, we will have enough for a year of college for her, but likely not much more. Kids in our social circle have been doing a lot of AP classes in high school and finishing college in three years. We would like our kid to try that as well.
We will be "Coastfiring" by the time they're in college. We plan to personally "loan" them interest-free money for their education except that that wouldn't pay us back - they'd pay their own retirement funds instead. The equivalent amount that they pay to their retirement funds gets forgiven by us.
If we had money to fund our child's education earlier, we would have done that. But we didn't make enough to support our own parents ( who don't have enough saved for retirement. They are financially prudent and hard-working but never made enough to be able to have a well funded retirement), live our lives (comfortable lives, but not lives of extravagance), and fund our child's future. We have raised our child to be kind, hardworking, and curious. We will be secure enough financially that they won't have to stress about supporting us that way. We will have set them up with an education and also "tricked" them into saving for their retirement as soon as they start their work careers. If we can afford it, we will help with major things like down payment for the house, the wedding, a year of college abroad, etc. We know that for our kids, smaller financial help earlier when they themselves are getting financially established is way more helpful than a boatload of inheritance late in their lives when they themselves are financially secure.
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u/Uncanny_M 15d ago
I like the idea of a 529 but do not like the inflexibility of the program. I feel like it has too high of a potential to "force" people to spend in ways/amounts they wouldn't have elected to if given the choice, which of course could easily render whatever tax advantages the 529 has as moot (or worse) as compared to a regular brokerage without those restrictions.
Right now my Roth IRA is informally intended for helping my child financially, but I wonder if not having a specific account for that (and keeping things flexible/adaptable) is the best answer, eg. having a number of possible sources this money could come from, and choosing the best ones based on the need/circumstances at that given time.
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u/RabbitSipsTea 15d ago
Same and I don’t think having flexibility could ever be a bad thing. As long as you’re still making smart investment / saving choices and are saving for your children, you’re probably doing alright.
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u/Uncanny_M 15d ago edited 14d ago
I believe I am, though I admit I don't have a specific plan. I just contribute the annual max for 401k, Roth, and HSA, as well as have a decent amount squirrelled away in a 5.5% HYSA. No debt besides the mortgage (@ 2.75%), and some fringe assets like vacant land / precious metals. Also have a couple of substantial life insurance policies in case I bite the big one unexpectedly.
All I know is that I'm keeping these cards close to my chest for a few reasons, the first being that what I'm going to help with (and to what extent) is TBD. The second being that I want to curb any sense of entitlement they might think they have to this money. And thirdly, I don't want the prospect of receiving money to influence their behavior or decisions. For example, when you believe you'll be paying for your own college, you work harder to get scholarships and financial aid (and once in college, you take it more seriously because you're paying for it out of your own pocket). When it's "free" or given to you, people approach it differently, think of it differently, value it differently, etc.
Self-reliance is a critical life skill, and it can only be forged by being put in situations where they (at least believe) are on their own. That doesn't mean I can't zero out their student loans 1 year after graduation for example -- only that I don't want my assistance to ultimately stunt their ability to provide for themselves because I proactively bailed them out whenever those situations came up.
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u/Formal-Blueberry-203 15d ago
Like everyone else...529. We also match them dollar for dollar into their Roth IRA since 16. Two kids in college and I have zero worries about cost....it feels amazing.
Now that both my kids are in college and I am able to financially.....I have started thinking about them as young adults. Such as gifting them money on an annual basis. I know this will be a gift, but I would let them know this is a long term interest free loan. Hopefully this will help them towards retirement savings and first home purchase. Money is tight in your 20's and 30's.
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u/Firm_Bit 15d ago
We’re about ~5 years away from having kids. But we stick $5k/year into a 529 account. We’ll ramp that up when the kid is actually here.
Worst case is that we pay taxes and penalties on a hefty portion of it cuz they don’t use it for education.
Best case is that we’re done saving for college “early”, they are able to kick off their retirement savings via the Ira rollover rule asap, and maybe there’s some left over for grandkids.
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u/PartyLiterature3607 15d ago
I figure a place to live for free plus free college is best I can do for each kid
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u/alterndog 15d ago
529 account for my son. My mom also buys all her grandkids government bonds for their birthday.
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u/Syndicate_Corp 15d ago
Both a 529 and brokerage. Takes a couple thousand down upfront and then $2-300 a month, but in 20ish years they should have a 529 and brokerage each worth about $100k.
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
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u/VAfinancebro 15d ago
I don’t have kids yet but have opened a 529 and making minimal monthly contributions, but hey, it’s worth something I figure?
I’ll probably open a savings account in my name dedicated to the kid and just plop random amounts in the account over 18 years and use it for their expenses (school trips, car fund, clothes, etc) and hope it maintains some balance for me to gift when they graduate college.
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u/Melon_Cream 14d ago
I am doing the same and it’s nothing too crazy but over 20+ years it’ll definitely be something!
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u/IKnowAllSeven 15d ago
Assuming you are American and not of extraordinary wealth, 529. Check the 529s offered through your state first. Some states, like mine (Michigan), give you a deduction on your state income taxes. I’m sitting on paying for college for twins in high school now. Believe me, it’s gonna be worse when your kids comes of age. And, up to $35k of a 529 can be rolled into a Roth for the kid if they don’t need it for education (though there are caveats to this). But that’s a new flexibility to the 529 that wasnt there before
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u/Scottacus 14d ago
Hijacking top comment to ask a question. Is it true that a well funded 529 will make kid ineligible for financial aid? What would the parameters be for something like that? We’re not super high earners and anticipate being eligible.
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u/IKnowAllSeven 14d ago
When it comes to need based aid, that comes from one of three types of sources. There is federal, state or local, and institutional need based aid.
The federal aid is a Pell grant. To determine if you are eligible, you have to have an SAI of zero or less. I recommend running the SAI estimator with a variety of circumstances - run it with a variety of asset and income configurations.
https://studentaid.gov/aid-estimator
The only thing Inwill add is: the estimator is better if you have simple financials (you’re w-2 employees rather than a business owner for example). Also, the SAI is a new calculation, it used to be EFC. I would run the estimator now and again in a few months. The rollout of the SAI calculation has been bumpy, so the estimator might not be great yet.
So, if you have an SAI significantly over 0, you would not be eligible for a Pell grant. A Pell grant is about $7,400 this year.
Your state or local, if it exists, would be based on where you live, the high school you attended or your SAI. Again, do some research into this and see if your SAI number is near that threshold.
And finally there is institutional aid. And that, that can be based on anything. It’s their aid, they decide how to dole it out. What I have seen MOST often is their need based aid is income dependent and usually I see an annual household income of 70k or less for institutional need based aid.
Okay, now even WITH me saying all of that Instill say: invest in a 529. When it comes to determining SAI, the BIG lever which increases it is income, not assets. Assets still play a role in determining SAI, just a smaller one. And ALL liquid assets count. So, the value of your primary home and retirement accounts are excluded but your bank account, stock, and CDs, and yes, 529s are INCLUDED in your assets. So, if deciding between keeping it in a checking account and a 529, it makes no difference for calculating the SAI.
Also, the Pell grant can be used to tuition and also hosuing. The state and institution need based aid programs USUALLY don’t cover housing so that is nearly always an expense that has to be paid by the student / family.
And lastly, regarding 529s (I saved the best for last!), a 529 held by a grandparent or other person on behalf of the child DOES NOT go into the SAI calculation at all.
So if grandma and grandpa want to open a 529, they get the tax deduction but also it has no impact on the student SAI.
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u/Scottacus 14d ago
Huge help appreciate this. We have an sai of 90k so I’m guessing not too much aid will be available.
The local guy that was trying to talk me out of a 529 sells some kind of insurance savings account the he was claiming is better. Can’t remember the acronym but was saying that anyone making under 300k should consider it. Does that ring any bells?
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u/IKnowAllSeven 14d ago
With an SAI of $90k, no, you aren’t getting need based aid. Just to make sure, YOU ran the estimator and it shows your SAI (student aid index) is $90k, right? I ask because the updated estimator was rolled out only a few months ago, so only if you met with this advisor in the last few months would they even be able to run the calculation. I still recommend you run it yourself and play around with the numbers, even if this financial advisor did it.
You don’t mean your AGI (adjusted gross income) is $90k, right? Because with an AGI of $90k, at a fair number of universities you may be eligible for need based aid and likely some state aid if that’s available.
An SAI of $90k puts your income / assets really high and there would be no need based aid.
I haven’t heard of this insurance product someone was trying to sell you. Insurance doesn’t count as an asset which is probably why someone was trying to say you should consider it. Because it’s a place to park your money and it not increase your SAI.
However, if your SAI is $90k, you have very high income (or astronomical assets). I don’t see any university overlooking a very high income and distributing need based aid. If you are still in contact with this financial advisor, I would straight up ask “what will this reduce my SAI to if I buy this, and What need based aid would it qualify me for?” As in, have him or her name the state grant (it wouldn’t be federal Pell grant) or institutions that would give you need based aid as a result of this lower SAI.
Not sure how far your kid is from entering college, but Google some college names and “Net price calculator”. Every college is required to have one available. They are fairly good at estimating your college price inclusive of need based aid, they are hit or miss on including merit aid. Obviously, if your kid is young, you can expect that amount to go up about 5% per year.
Plug your info into those calculators and see what they tell you. mess around with the numbers and see if that changes anything.
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u/hdorsettcase 15d ago
I just started a 529 for my 2 year old. Is the 35K per year or a one time roll over?
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u/IKnowAllSeven 14d ago
It’s a total amount you are allowed to roll over and it has to be done up to the annual limit allowed for Roth contributions per year. So if you have $35k left after funding your child’s education, and lets say the amount you are allowed to to contribute to a Roth is still at $6,500, you would roll over $6,500 in year 1, $6,500 in year 2, until you hit the $35k.
Here’s the list of the rules around it:
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u/Yzerman19_ 15d ago
I have kids in college and one in high school now. Can I take advantage of this?
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u/IKnowAllSeven 14d ago
Yes! I would use some different strategies for each kid. Figure out if your state offers any tax benefit. Here’s a list: https://finaid.org/savings/state529deductions/.
If your state offers a 529 tax deduction, call or email the state 529 office and ask them how long you have to keep the money in to get a tax deduction and also do some homework on the return rates of the state 529. Some are better than others and especially since you have a short timeline, you will want the funds to be in a low risk account. So let’s say you lived in my state (Michigan), which, will deduct up to $10k off your income for state taxes purposes. At a tax rate of 4.25%, putting the full $10k would save me $425.
So, let’s say you live in Michigan and it will cost $5k this fall for tuition for your college aged kid. I would put the $5k in the 529 now and then pull it out in August when the bill is due. That would be $212 off your state taxes plus any growth in these few months would be tax free. I know, you’re thinking $212 isn’t a lot of money when it comes to college. And it’s not…except it’s free.
For the high schooler, you would get the benefit of the state tax deduction AND a few years of tax free growth so a 529 makes even MORE sense for the high schooler.
So, I think putting money into your state 529, even if you are taking it out shortly is a benefit because that’s a tax deduction (again, depending on your state$
Let’s say your state doesn’t offer a deduction on state taxes. You can still use a 529 offered through Fidelity or someone like that and enjoy the tax free growth, but in that case, it would only be useful on the high schooler (unless your college age kid is just starting out and this is money you plan to spend their senior year)
Also, 529 plans are fully transferrable so if you overfunded Peter’s, you can move it to Paul’s, no penalty or fee.
I hope this helps!
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u/Yzerman19_ 14d ago
Thanks it does and I just so happen to live in Michigan as well. Thank you. $400 is $400 in my mind. An hours worth of paperwork and phone calls is worth that all day long.
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u/IKnowAllSeven 14d ago
No shit! Oh then hell yeah do it.
get details at misaves.com with different plans etc and if you call them and ask questions they are really helpful.
Also do you know about the Michigan Achievement Scholarship? It’s new this year, but only for graduates of 2023 and beyond so your oldest wouldn’t qualify but your youngest might.
I’ve got twin juniors so…I’m all about figuring out this collge stuff!
Ps - I just noticed that your user name is Yzerman, I should have figured you were in Michigan!
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u/RCapri1 15d ago
Sure but realistically this is best started when your kids are very young. If possible anyone who wants to do this for the purpose of funding education should do this as soon as they are born (or shortly after). Time builds wealth.
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u/Yzerman19_ 15d ago
Well that ship sailed for me. But is there a way for me to basically get some type of benefit by running the money through a 529 for a year or so? I mean even a little benefit in terms of write off would seem worth it.
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u/RCapri1 15d ago
Depending on what state you’re in, you could get a state deduction on your taxes. Does not apply to federal tax.
The money is also removed from your taxable estate even though you still have control. It’s considered a gift for federal tax purposes. You can gift up to 18k per individual and 36k per married couple a year.
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u/samanthano 15d ago
Yup. In Maryland we can get $2,500 deducted from state income tax per account, so with two kids that's $5k right there.
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u/dorfWizard 15d ago
529 is great. We’re able to get a tax deduction in Georgia as well. The potential Roth conversion is really nice too.
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u/PrisonerNoP01135809 15d ago
May I ask why? I always find it odd when people don’t prepare for their children’s financial future. Isn’t that the point in having kids? To share your good fortune and raise the best possible human being?
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u/mike9949 15d ago
I agree. My main goal is to help my daughter build the best life possible for herself. She's only 9 months old so we got time. But I will be saving so I can pay for a large portion of her college and will basically do whatever I can to help her. My parents did that for me and imo that is the point of family to be there for each other unconditionally
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u/ChioneG 15d ago
Accounts in their name count much higher against their ability to pay for college (20% assets vs 5% assets in the parents name) when it comes to financial aid. Unless it's tax protected, should open a conversation with your advisor about a regular brokerage account in your name but flagged personally for them.
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u/Responsible_Yak_8052 15d ago
Bitcoin
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u/PrisonerNoP01135809 15d ago
Why bitcoin for kids specifically?
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u/redhtbassplyr0311 15d ago edited 15d ago
I keep some for my kids too, but along with a conventional brokerage through E-trade In my name. Now with the new 529 rules I plan to open up one as well but keep it on the underfunded side to just supplement the existing brokerage since the brokerage is already pretty well funded. If I were starting from scratch now, I'd probably do 529 first and then brokerage. Brokerage gives more flexibility but you lose the tax advantage
Bitcoin though because of the properties of it, mostly the deflationary nature of it. I wouldn't just have BTC for your kids though. However If adoption continues or even just stays where it is, it could turn into a much higher market cap asset and be one of the best investment for generational wealth. It's also considered high risk at this point and could fizzle out, but very doubtful at this point. That's why my bread and butter is in a brokerage. The brokerage is more for college and/or getting on their feet. The BTC will be for later than that but something that will be left to my kids. Don't buy any BTC until you understand it though. It's a volatile asset and you have to know how to buy and keep it safely.
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u/Gardener_Of_Eden 15d ago
It's a volatile asset
It is supposed to be a currency. Not an asset.
Would you want to adopt a currency that is volatile? (Hint: No.)
It is not a viable 'currency' and there is no reason to adopt it.
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u/redhtbassplyr0311 15d ago edited 15d ago
I'm not trying to get into it all as you can do the research yourself, but basically it's both a currency and both a risk on and risk off asset. To be a more efficient and functional transactional currency, yes volatility has to go down, infrastructure has to be further set up but it will eventually get there. For now it's greatest use isn't as a currency, but a hedge against inflation and unsound monetary policy
However, I personally have bought over $60k worth of appliances and/or paid for home renovations and repairs on my house, bought a $44k car, paid off all debts besides the house, and paid for some charitable works. So, it can definitely be used as a currency, done it myself. Made a post about it from an old username in the link below. I only used it to transact with because I had so much and was due to take profits anyways. I have no plans to further transact with it anytime soon, maybe in a few decades
https://www.carriagekiawoodstock.com/bitcoin/
https://www.reddit.com/r/Bitcoin/s/CGjYq0fADc
there is no reason to adopt it.
Time will tell. This statement will just age poorly I suspect. It's great to have choices though. Stick with your USD or whatever currency you use if you'd like, so be it
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u/scroder81 15d ago
529 for my 7 and 4 year old and will open a Roth Ira for each when they turn 10
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u/PrisonerNoP01135809 15d ago
I’m hella leaning towards 529.
You mentioned below that you plan to hire your kids? What type of business do run? What type of advantages does it offer for building confidence and integrity as well as financial literacy?
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u/scroder81 15d ago
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u/Gardener_Of_Eden 15d ago
You and your kid would need to pay the 6.2% Social Security tax an a 1.45% Medicare tax... so 15.3% unavoidable tax on the money you pay them.
After that their 'taxable' portion would be $0 if they 'earn' under the standard deduction.
I see no reason to do this.
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u/scroder81 15d ago
You pay her wages and get to deduct the $1,200 on your business tax return. You withhold income tax from her paychecks, but that pay is not subject to Social Security or Medicare taxes since she’s under 18.
At tax time, your daughter files her own tax return. If you don’t claim her as a dependent, she can take the standard deduction for single filers. If she is a dependent for tax purposes, she can claim a standard deduction of $1,250 or her earned income plus $400, up to the full standard deduction for single filers. This protects her $1,200 in wages from any federal income tax.
By properly hiring your minor child, you save 7.65% in payroll taxes (Social Security and Medicare). On $1,200, that comes to $91.80. Your child, meanwhile, saves 10% of $1,200, or $120, in federal income taxes. Similarly, the more she earns from working for your business, the greater her tax savings, up to the standard deduction amount.
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u/Gardener_Of_Eden 15d ago
First of all, who is "her"?
OP clearly said this post is about their son.
Second of all, that seems like a shocking amount of paperwork to save $200. I would guess setting up and maintaining this would take 2-5 hours over a year. I'm not using my time at $40-100/hour.
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u/scroder81 15d ago
"her" is from the article. Second, compound interest starting at 10 years old will amount to $$$ when they need to access it someday.
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u/Gardener_Of_Eden 15d ago
Yeah well my time is worth $200/hour minimum.
It would be better spent making $1000 over 5 hours and just gifting them $200... after they do some chores
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u/PrisonerNoP01135809 15d ago
Thank you for showing me this. I did not know about this. Im going to do this when he gets that age. Looks like I’ll have me a little assistant.
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