[Editor's Note: This is a “Kid's Korner” post from our only paid columnist here at WCI, Whitney. She did one each quarter this year; you can see them here, here, and here. But given how much nagging this one took, it may be the last one for a while, unless you guys take up nagging duties for me. This post is the long-awaited one about child investing accounts.]
I have quite a few accounts for a few different reasons. My parents believe strongly in education and want me to have a good education, but they also want to teach me how to manage money effectively. My parents also hope I can avoid getting into as much debt as many young people these days.
My Four Investing Accounts:
1. Credit Union Savings Account For Spending
The purpose of my savings account is for spending money. The money in this account is money I’ve made babysitting and gift money that I’ve received for birthdays, allowances, Christmas, etc. I currently have four or five hundred dollars in this account. I’ve used money in there to buy myself a new phone and few other things. Now, how much would I like to have in that account? I mean a million dollars would be great but it isn’t very realistic. I think in the next few years I’d like to have a least a thousand especially once I get a regular job when I am a little older. This account really isn’t about the amount of interest I get back because it only pays 0.1% percent in interest. My dad says I could swap it for a high-yield online savings account and get $4 a year, but it's kind of hard to get excited about that.
The author, just hanging around
2. UTMA aka My Twenties Fund
UTMA stands for Uniform Transfers to Minors Act. This account is what my dad calls my Twenties Fund. My parents ‘philosophy is that it's better to give me money in my twenties when I actually need it instead of when they die and I don’t need it as much. So they started this account for me back in 2008. All of the money in this fund is contributed by my parents. I currently have $13,412.56 in this account. How much do I want to have in here? I don’t really know but things I’m going to need money for in my twenties include a mission, a house down payment, a car, a wedding, backpacking Europe etc. So it would be really nice to have quite a bit in there. It is invested in the Vanguard Total Stock Market Index Fund and the Vanguard Total International index fund. Since it was opened in 2008, when I was four, its returns have been 11% per year. Only around $6,000 was ever put in there and look how much it’s grown!
3. 529 College Fund
The purpose of a 529 is purely to save for education. Most of the money in this account was contributed by my parents, but some of it is from me. In fact, my dad will give me a match on my contributions. So if I put in $50 he’ll put in double that so another $100. Right now I have almost $47,000 in that account. My school counselor asked me about college savings in my recent college preparation meeting and was super impressed not only with the amount in the account, but that I had an account and actually knew about how much was in it!
The college I'm thinking of going to right now charges $5,460 a year in tuition. So if I were going to college now I would have enough to get a bachelor’s degree without taking out a loan, even without a scholarship. However, there are many scholarships I plan to apply for including the Utah Regent’s Scholarship. I would also like to attend medical school which could cost $50,000 a year in tuition alone, so hopefully, I can save more and not use all of this in college. It is invested in:
- Vanguard Total International Stock Market Index Fund (50%)
- Vanguard Small Cap Value Index Fund (25%)
- DFA Small Cap Value Fund (25%)
This is a very aggressive way to invest. We invest this way because #1, I don’t pay much attention to the markets so it doesn't bother me when it goes down in value and it doesn't bother my dad because he feels like it isn't really his money. And # 2, if this doesn’t work out I have three other “pillars” to fall back on in case the market crashes right when I start college. I have two funds invested in small value stocks because the Utah 529 plan only lets you put a maximum of 25% of the portfolio into each of its riskiest funds, so I have to use both of them to get 50% of my money into small value stocks.
This account was started back in 2010, but my college account actually was started in 2007 when I was three. It was originally in a Coverdell Educational Savings Account when my dad was in the military. Then it was rolled over to the Utah 529 when we moved to Utah. The overall return for the last decade has been 8.3% per year.
The Four Pillars of Paying for College
I mentioned the “pillars” of paying for college earlier. There are four pillars to paying for college. The first one is choosing a college you can afford. If you choose a really expensive college, that’s great but you might be in debt for years to come. The second one is your contributions- scholarships, savings, part-time work during school, and full-time work during the summers. The third pillar is your parents' college savings. The last pillar is your parent’s cash flow. This is the money they make while you're in college that they give to you.
4. Roth IRA Retirement Account
The Roth IRA is my retirement account. This is important because you can only put money in it that you actually earn working. My parents can't put money in there for me. This money is from babysitting and getting paid for modeling and writing for this website. Sometimes my dad gives me the same amount of money that I made so I don't feel bad when I put all of the money I earned into the Roth IRA. He calls this the “daddy-match.” He says it is great when he can pay me to do something because then he doesn't have to pay payroll or income taxes on it (because it's a business expense), I don't have to pay payroll taxes on it (because I'm a minor and the only owners of the business are my parents), and I don't have to pay income taxes on it (because I don't make enough money to owe tax.) If I put it in the Roth IRA, it never gets taxed at all.
I currently have almost $7,500 in this account, which is the total of everything I've earned in my life plus the earnings. I would definitely like a lot more but I have some time until I’ll need it. It is invested in the Vanguard 2060 Target Retirement Fund, a fund of funds. The four accounts that make up this fund are:
- Vanguard Total Stock Market Index Fund (54.50%)
- Vanguard Total International Stock Index Fund (35.50%)
- Vanguard Total Bond Market ll Index Fund (7%)
- Vanguard Total International Bond Index Fund (3%)
I started contributing to this account in 2015 when I started working, and so far my returns have been 18.1% per year, which is a whole lot better than my savings account.
Gratitude
I am very grateful to have the opportunity to invest in these accounts. Most kids don’t have this money or support from their parents and I understand what a great opportunity this is to learn about money and stay out of debt. This is important because people who know how to manage money can use their money to help others by creating jobs, donating to charities, or otherwise paying it forward to help someone in need. I hope some of this information was helpful or at least interesting.
Questions? Comments? I’ll answer them below. Merry Christmas!
Awesome post. You definitely should keep writing! You are good at it! Thanks for sharing your story. It is inspiring and makes me want to improve my investing. Keep up the good work.
Thanks!
This topic is really important to me.
My parents failed to teach me pretty much anything about personal finance. I had the GI Bill in college while I also had a full scholarship that covered all my expenses. Know what I did with that $700 I got every month? I spent every dime. Didn’t save a nickle.
I think it’s great you are teaching your kids so young about finances. I intend to do the same with mine. Already working on money and value, but my oldest (of three) is only 6.
If my site ever takes off, I’ll likely have them post as well and serve as model so I can provide a “daddy-match.” Great read.
P.s. how young did you feel comfortable to start paying your kids (modeling, writing, etc) so they could invest in their own name? Any guidance on that?
The 2 year old has a Roth IRA. The IRS does ask me questions about her though. Doesn’t even blink at the other three.
That’s good to hear. I’ve heard from a few people that 8-9 YO is about where the IRS starts becoming more of a believer in children’s earned income. Prior to that, sometimes a bit of explanation is needed to satisfy them.
I think that’s right and reflects my experience. It was an easy form to fill out for the 2 year old though.
Good for you Whitney. My daughter has all those too. It is a great way to learn about money. She has been amazed when $1,000 goes to $1,600. She knows that is money she didn’t even need to babysit for to earn!
Awesome post Whitney.
Thank You!
Merry Christmas to you and the entire Dahle family, Whitney!
Not only do you have more investment accounts than a lot of people I know, but you’ve got more money invested that a lot of people my age, too. Keep up the great work with the babysitting, modeling, and having awesome parents. And keep up the writing, too. I don’t want to have to nag. 🙂
Holiday Cheers!
-PoF
Thanks! Will do.
Wow! She’s an even better blogger than you! This is awesome. Way to go Whitney!
Editors never get any credit. 🙂
I think we have a WCI junior in the making 😉
This is a very timely post for us – we’re about to have our first child. I do have a question on the 529 plan. You mention you contribute and your dad (grandparent) contributes as well. Is that a direct contribution from him or does he give you a check and you deposit it?
This is something I may want to bring up to my parents and/or my wife’s parents. I know they would be interested in helping with college when that time comes, but may have not considered starting it now.
Grandparents aren’t contributing to this account (at least not yet.) It goes from mom and dad’s checking account into the 529. Certainly it is easy to set up to allow grandparents, family, or friends to contribute.
I set up our son’s Utah 529 so that others could contribute and we informed his birthday guests (first birthday) that this was an option for a gift and gave the link with the invitation.
We only had two people give gifts through it and I think the biggest barrier is that the only way to contribute is through a direct account withdrawal, meaning you have to give your bank account number and routing number to give a gift, which I think many (especially the older generation) are squeamish about doing. There is always the option of them writing you a check or giving you cash and then you deposit it into the account.
With the Utah 529 plan and I’m sure any others, any contributors can send a check directly to the plan as long as they have the child’s account number. This takes out any uncertainties one may have with providing bank account information or giving money directly to the parents. Grandparents or others could also set up their own 529 account for the child especially if their state provides a tax credit for the contributions to the account owner.
To be fair, the parents could just pull the money out and spend it on crack. If you want to control the account, you need to own it.
Excellent post, Whitney. You taught me a great amount of information. I have recently been exploring the investment options for my daughter and this was very helpful!
Keep up the great work.
Merry Christmas.
Thank you!
Good post Whitney! Always look forward to reading your columns!
Thanks!
Nice job, once again, Whitney. My teens have the same accounts plus one- the Capital One 360 “Money Card” checking/debit account, designed specifically for teens.
It allows their father (me) to automatically deposit their allowance and any extra funds they may need, through a very robust app, and also monitor their spending (and sometimes whereabouts!). I have my own savings and checking accounts at Capital One and move money back and forth from my local bank checking account.
My kids have enough in their 529s to fully fund college, and my son, a college Freshman, is just starting to draw from his. They also have a “20’s Fund”, which I have clumsily named a “Starting in Life Fund”, ideally to help pay for grad school, make a home down payment, start a business, or even make the foundation for a retirement nest egg.
Good luck, Whitney. I hope to see you writing here again soon!
Maybe we’ll have to give a debit card a try.
All she needs now is a donor advised fund and she will hit all the major accounts. Nice work. It is cool to see how aware of these vehicles she is and the planning that is already going on.
This is like a DAF mania. I think you guys are just teasing me now.
What, no solo 401(k)? Haha 😉
No, as we determined earlier this year, she isn’t self-employed! So no solo 401(k). Which is fine, she doesn’t make enough to max out her Roth IRA.
If she isn’t maxing out her Roth IRA maybe you need to pay her more. Given her beauty and writing style, I think she deserves a raise!
Yeah what he said!?
How much do you think I could justify paying for a blog post to the IRS?
Well, that’s the tricky part, isn’t it? I haven’t seen any hard and fast guidelines. I’m saying this half in jest.
Great job Whitney! With this kind of start in life and the knowledge you already have, you’re 110% guaranteed to succeed and have a worry-free financial life.
As one of your non-doctor readers who gets tremendous value from this blog, I’d like to wish the Dahle family and the entire WCI network a Merry Christmas and Happy New Year!
Thank You! Happy New Year!
Hi Whitney,
Great post! You have some awesome writing skills for your age. I may need to show this post to my oldest daughter (just about your age) to show her an example of good writing – very impressive!
I did have some quick questions for you. First, have you thought about getting a debit card for routine spending? This seems to be a growing trend among my daughter’s classmates, as she and I think it’s easier and more secure than carrying cash everywhere. As a parent I also see this as a great way to help her learn more about responsible spending, how checking accounts work, etc – all stuff I never learned how to do until I hit college. They have banks out there (we actually use one) that offer these kids of accounts for kids, with tools to help parents keep an eye on things such as parent logins, lower daily spending limits, etc. Our bank also offers higher savings rates as well, even for teen accounts. Curious to get your perspective on it.
Also, how do you feel about the risk associated with investing? My daughter told me once that in her personal finance class at school (required by our school system), her teacher taught her class that investing is very risky and that you shouldn’t do it because you can lose lots of money. I actually got very mad at my daughter’s teacher for describing the stock market like this, and have had to spend a lot of time with my daughter to understand the risks better and also understand why stock investing is still important despite the risk. Very frustrating. However, I also suspect that many adults feel the same way so this may be common. Have you had a similar experience (either with teachers or with friends), and (if so) how would you respond?
The debit card for teens is a great idea for another post she can write!
Well when I told my friends that I payed my taxes, three of them thought paying taxes before you’re 18 was illegal. No one has really said anything about though.
*Nobody has really talked about investing much. We are probably going to try a debit card this year and see how it goes.
“This is important because people who know how to manage money can use their money to help others by creating jobs, donating to charities, or otherwise paying it forward to help someone in need.”
Best sentence of the post! Congratulations! Merry Christmas!
Great Post and wow, what a great start. Your parents are doing you a tremendous service and you are doing them one back, but learning so well.
Keep up the good work and keep posting. I like your style.
cd :O)
Nice review for us grown-ups with young kids-thanks for the information and ideas!
Quick questions (for dad maybe)-can a parent donate shares of preferred stock into the UGMA/UTMA accounts or only give cash?
Does it make sense to contribute more than enough for college into the 529? I don’t even know if our kids will want to attend college, or maybe they will have merit scholarships for college?
I told our accountant that I didn’t intend to be in as high a tax bracket by the time my kids are old enough to consider raiding the 529 for a house down-payment. Maybe that would be a good excuse for a sabbatical?
Yes, a parent can donate shares to a child. However, the child inherits the parents’ tax basis (unless they’re dead.)
Yes, it makes sense to contribute more than enough for college into the 529 if the kid is thinking about grad/professional school. But no, in general you don’t want to put dramatically more into a 529 than will be spent on education. Not a huge deal though. You can pull the money back out penalty free if they get a scholarship. You can change the beneficiary to another family member (including the child’s kid). Or you can just pull it out and pay the tax and penalty on the earnings.
But no, it usually doesn’t work out well to invest for a house down payment or retirement in a 529 due to that penalty.
https://www.whitecoatinvestor.com/investing-for-retirement-in-a-529/
As grandparents, yearly we choose to donate low cost basis Vanguard mutual fund shares to each of our grandchildren’s custodial accounts…… as another strategy for re balancing to keep our equity asset classes within their target guidelines.
Since our grandchildren are young (from age 2 to 15) with another on the way, I don’t see having a low cost basis much of a tax problem for our grandchildren. In fact, we hope that in the future, our grandchildren will be willing to donate these same low cost basis shares to charity (or to our family charitable donor advisory fund) as part of their annual giving.
Great article, Whitney. All of our grandchildren each have 3 of the 4 accounts; but, none have the Roth IRA accounts. But, hopefully, by 2018, the 2 older grandchildren will also have their own Roth IRA accounts. Thanks for inspiring our family!
Why would you give the low basis shares while you’re still alive? Is the idea that they can then tax gain harvest them and nobody pays the taxes? I guess that would work up to a certain amount before the kiddie tax kicks in.
If your hope is for them to donate to the DAF, why not just donate them yourself to the DAF? That’s a great way to flush low cost basis shares out of your portfolio.
WCI,
Both of your answers are “spot on.”
Yes, our grandchildren could (and have on a very few occasions) sold their shares without having to pay income taxes; but, mainly their sales were actually done for rebalancing purposes.
And yes, more than 90% of our annual giving to charity is done by first giving our lowest cost basis (on a percentage basis) equity investments to our charitable donor fund.
Both of our adult children also do the vast majority of their annual giving to charity likewise by first donating their own low cost equity investments to our family Charitable Donor fund. And in all cases, the equity investments donated are made primarily to rebalance to each family members’ target asset allocation guidelines in the most tax efficient fashion.
WCI and Whitney,
I would love to know about 2 things that I thought of as I was reading this. These may be ideas for a future post, or maybe you can more simply answer the questions here
1. How your current income level affect your future social security? I know that when I had a job in my teenage years, the SS admin knows about it and considers it for future Social Security payments. I have never thought about how much this would affect the numbers, although I suspect very little. It has to affect it some though especially if you are starting at age 2 (with modeling like your little sister).
2. Advice for jobs besides modeling with kids and when is a good time to start Roth contributions for kids as it relates to IRS flags?
Thanks and Happy Holidays!
If the business you work for is owned 100% by your parents, then no SS taxes are paid on that income while you are a minor. So no payments and thus no benefits. Household employees making little money (i.e. babysitting) also don’t pay SS taxes on that income so no tax but no benefits for it.
If the kid has earned income, put it in a Roth, “IRS flags” be darned. If it is legit, it’s legit, and don’t let a “red flag” scare you off from doing it.
Babysitting, snow shoveling, lawn care, picking up sticks, modeling, etc. But remember that household chores for your family don’t count as earned income, even if you give them an allowance for it.
Good overview of what accounts can be set up for children. Impressive writing. My notes: So my kid just turned 18 and is still in high school. I just put him in a Personal Finance class for last semester. I pulled him out of calculus. Just seemed one was more useful than the other at this point with 5 months of school left. i’m pretty sure there will be better take away points in personal finance than his ability to use derivatives down the road (because he is NOT going to college to be a rocket scientist). When I look back my most useful class in high school was typing…by far more useful than my trig…..
I just got all his finances “in order”. he now has his OWN checking account, OWN credit card (i had been a co-signer on his since he was 13) and OWN brokerage account. He had some smaller UTMAs from grandparents that we relinquished the custodianship and moved those assets into his now own brokerage account. He still has the UTMA we started when he was born (and i am still the custodian for the time being), but I no longer put money in it. I did the calculation and for what I opened his brokerage account for, if he leaves the money sit and never touches it he will have 1 million at age 65 using a 6% return.
we also did financial POA. when he is away at college and has trouble with any of his accounts. I can take care of them directly if need be or should something happen (G-d forbid but since he is single it helps legally).
i just showed him how to pay the credit card bill using his app. (ie move money from the checking to the CC)…he asked “so how does the money get into the checking account?” lol. that has to still come from us since he is really unable to work due to his travel schedule. i’m trying to figure out a good allowance for college. He won’t need much since meals are covered, etc. But i’m sure he will need to buy something at some point……like laundry soap……. But he’s been starting to think about finances a lot more…he just calculated the other day how much his massage therapist costs annually for us and was kind of shocked….another cost which will be completely absorbed by the athletic department next year and not out of my pocket. Yippee!
I’m trying to decide whether to delete this post before Whitney sees it. 🙂
Hey Whitney- don’t get any big ideas. You WILL NOT be getting an allowance from us when you go to college. You turn 18, you’re out the door. Maybe we’ll let you stay a few weeks more until you graduate from high school. You can get your own car, job, and apartment. Need money in your account? You know where that comes from, and it isn’t trees! You want to use it for a massage instead of food, that’s your call.
I’m still completely baffled by an 18 year old with a “massage therapist cost”. What is our society coming to?
he plays sports at the top level. Has an entire entourage, his sponsorships, etc.. it’s basically his job. In college due to going to class, the mandated NCAA study hall hours and the amount of time with the team (capped at 20 hours)…it’s a tad difficult to work to get his own income. So i’m trying to calculate a reasonable allowance based on those hours with the team…he’s generating his NCAA scholarship from that…..so it’s not like there is no return……
I’m pretty sure the day I turn 18 you’ll kick me out of the house.
Great post Whitney. It’s given me ideas on how to shepard financial awareness with my 8 yo daughter. Please keep posting, and thank you!
This is a great post. You should be proud to have such a mature young lady! I have a few questions for both of you?
You are all saving for a state school and targeting the earnings to that. What do you all recommend we set as a savings target (assuming other financial factors aren’t at play)? When I do the calculators I look at the cost of a middle of the road private college. I figure if they do go to a state school they’ll have money leftover for grad/med/law/whatever school afterward or it could be saved for their kids down the line.
What do you recommend as a good calculator to set a goal? I’ve used various sites calculators and it seems i’m either at goal or slightly under for my 3 kids. However, recently I used the calculator on personal capital and it says I’m over goal.
She’s actually hoping to attend a private university that happens to be very affordable and is in fact cheaper than our in-state schools. It also makes it very competitive to get into so we take that into account with our planning. Knowing how much to save for college can be tricky given the increasing costs, its a very cloudy crystal ball and so all calculators are just estimates. You’re probably doing great if you’re high on some and low on others. Remember your savings is only one of the four pillars for paying for college.
I don’t know of a good calculator, I just use Excel for stuff like this. It’s all garbage in/garbage out of course. Use the wrong assumptions and you’ll be way off.
There are two approaches- 1 is defined benefit, you try to have a certain amount in the account by enrollment. If you expect that amount to equal the cost of education, then you’ll have to make some guesses and calculations. 2 is defined contribution- you just put in a certain amount each year and hope that’s enough, knowing there are other ways to make up the difference. We do a lot more # 2 than # 1. The original plan was about $20K total per kid per 529. Then WCI, LLC started making money…
I’ve got a post on this exact question set to run in about a month.
Whitney,
Nicely done. The thing I like the most is that you seem to be absorbing the information your parents are teaching. I feel very proud whenever I see my kids doing something I taught them. You should be proud of your financial accomplishments. You are way ahead of the pack. Now teach it to your friends and see how many you can bring along with you.
Keep writing, the world needs to know what you know.
Merry Christmas
Dr. Cory S Fawcett
This is a great post, and you are in a very strong position for financial success in life. It is admirable that you want to become a physician, it is a hard but rewarding road.
One thing that I want to say is to never feel guilty for the position your parents worked so hard to put you in. There are many people who do not have the opportunities that you have, and I am sure that you understand that. When you get into college, or into medical school people may make you feel guilty for what you have. Just pay it forward when you can and continue to be a good kid.
keep up the hard work!
My favorite two lines from your post (for many different reasons):
“The college I’m thinking of going to right now charges $5,460 a year in tuition. So if I were going to college now I would have enough to get a bachelor’s degree without taking out a loan, even without a scholarship.”
Thank You!
Great article, Whitney! It gave me some ideas for my 3-yr-old daughter. Merry Christmas!
What are the advantages of a UTMA account? Let’s say I want to pay for my kid’s wedding in 20-30 years (or help with a house down payment, etc) What’s the difference if it’s growing in a UTMA account, vs growing in my taxable account?
it is tax favorable up until kiddie tax kicks in. per the new tax reform now, how it is taxed once kiddie tax thresholds are met is also more favorable. less important now with estate tax changes, but it is also a estate tax strategy because those assets no longer belong to you. For FAFSA purposes, they are non-parental assets which belong to the student (mostly irrelevant for physicians anyways that point). to pay for the wedding, cashing out the assets there may be less tax burden if custodianship is relinquished because your kid will prob be in lower tax bracket for capital gains, etc.
First $1,050 isn’t taxed, second $1,050 taxed at child rate. At a 2% yield, that could be $100K before it starts getting taxed at the parent’s rate (trust rates start next year).
Also, look into recent tax law change, kiddie tax = trust tax treatment (I think)
Yes, that’s correct. Still the same $1,050 tax-free and $1,050 at 10% before you get into the trust brackets though. In fact, that would help us since our top bracket is no different than the top trust bracket and our kids would at least get a little more income before it hits the top bracket.
Is the UTMA held in a taxable brokerage account? If not where does one open an UTMA with investment options?
Ours are at Vanguard. They’re not “in” a taxable brokerage account, they ARE a taxable brokerage account. For a kid. But they’re a separate account from our taxable account.