more investing for kids questions

[crabbypatty]

I have been looking at Fidelity for mutal funds to open for my kids but I'm a bit confused.

How do I decide what type to invest in? I asked about their index funds but was told that there is a $10,000 minimum to open an index MF.

Where can I learn the difference between large cap growth, mid cap value etc?

[Scanner]

http://finance.yahoo.com/funds

There is a good link to get started on basics/fundamentals.

T. Rowe Price usually has a $2500 minimum, which is waived if you commit to a $50-100/month automatic investment plan.

I have never much been impressed by Fidelty as a mutual fund co.

Obviously, with a 10K minimum, they are not looking for average investors.

More than what type of mutual fund (large cap/mid cap), you should decide on the allocation mix - if it's for college, you should probably hold a little bit in a bond mutual fund or individual bonds, unless your kids are 2 years old maybe. Sometimes a correction in a stock market can last years.

If it's just for a house someday, it almost doesn't matter what you pick - over the long haul, it should net a decent return for them - you may want to set it up as a UGMA/UTMA or whatever it is for tax reasons.

[MonkeyMama]

IT depends on the fund and the type of account. If you search Fidelity for "UGMA" it showed a much lower minumum for those accounts (accounts in kids names, parents as custodian). I forget what it was, but in general the minimum was way less than $10k. though some mutual funds will have limitations. It may be easier to call customer service and check on the fees and minimums once you pick out a few funds. If nothing else they usually lower the minumums for UGMA funds.

Vanguard Star is a good fund that has a $1k minimum for UGMA accounts. What their website says anyway. I checked because I opened a STAR fund last year and the minimium was lower than the rest of the funds. So was just wondering if the UGMA minimum was lower too - and it was. Was not even the reason I picked the fund originally, but is nice. Good fund, not on the extremely risky side either. I am starting with that until I build a larger balance with more choices.

I have some of our retirement in both Vanguard and Fidelity and am pleased with both personally. Though I do lean towards Vanguard's funds a little bet - I guess I agree they are a little better.

[crabbypatty]

UGMA? UTMA? I don't know what these mean. This will not be earmarked solely for education. We have other plans for that.

I am quite new at the process. I figured that anything has to be better than just putting birthday and Christmas checks in the bank.

(At Fidelity only the index funds have a 10k minimum. All others are $2500 to start w/$250 minimum to add unless you do a monthly auto invest. Then you can add $100 at a time.)

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Uniform Gift to Minors Act.

You are "custodian" of the money but when they turn 18, some states 21, they now have jusidiction over it.

They can spend it on a house, vacation, sports car, whatever they want.

A Education IRA or 529 account must be spent for college, books, room and board, something college related.

Most people do it this way because if you put it in your name, with the intention to give it to them, the gov't sees you as owner and you will be held responsible for any gains and taxed accordingly.

[jIM_Ohio]

If you were to choose a single long term investment for a child, I would consider any of the following types.

Large Cap (Growth, Blend or Value)

Large Cap Value tends to have slightly higher long term returns than the others (.5% maybe). If you see a fund called "equity income", this is probably large cap value.

S&P 500 index funds would be large cap blend.

T Rowe Price allows $50 assett builder account minimums.

A second option is sharebuilder. This is individual stocks. $4 per trade, scheduled monthly. Purchase large companies which should be around when kids are 25-30. MSFT, ORCL, PG, HPQ come to mind. I have a sharebuilder account for my goddaughter.

The account I have for her holds MSFT, HPQ, F, TLB and PG. My criteria for choosing a stock is I want a company which should be around when she's 18 (she's 3 now). It also needs to pay a dividend. I try to choose different companies (to be diversified). It will take about 10-15 stocks to be truly diversified. Sharebuilder reinvests dividends for free. If you are high on a certain company, you could start a DRIP (dividend reinvestment program) with company and avoid the $4 fee from sharebuilder. DRIP requires a steady investment, and some companies may require you to buy first share through a broker (which could charge a $10-30 fee)

If you go the equity income or dividend stock route, the first $250 in dividends for a child are tax free. It would take an account balance of $6250 to generate $250 on a GOOD YEAR (4% yield)... once a child made $250.01, I believe they need to file a tax return. 4% is a real good yield for stocks, 1.5-2% is more typical (for stocks I choose anyway).

Dividends are also a good way to teach them about investing when they turn 11 or 12.

[crabbypatty]

Thanks for the input guys.

I know this may be silly but it's a good example of how pychological factors influence money decisions:

I've heard people talking about T. Rowe. But I can't invest with them. B/c I know someone who is a manager there that is absolutely horrible with their finances. Creditors calling, bankruptcy etc. I am not exactly sure of this person's position, but I know they are a manager. The thought that T. Rowe trusts this person with anything financial scares me and therefore I can not trust them with my money. It's silly b/c the person I know may not have anything to do with managing funds etc. But it's a psychological hangup I have.

I want the money to be in their name, it is theirs. However, if it grows to a significant amount maybe I could convert it to a trust so that they can get it later then age 18? It isn't for education b/c they already have accounts for that. This would be for a house etc. And we've got a long time for it to grow.

[Scanner]

It doesn't have to be T. Rowe Price - it's just that they have a way of getting around the minimums.

If you have $2500, you could consider Janus - www.janus.com but they don't have any index funds plus they are volatile. There are literally 100's of co.'s to choose from - we are just giving your the biggies. American Century is another co. that comes to mind.

If you are going to mind seeing that money go up and down, I would forget indexing and just go with a balanced fund, a mix of stocks and bonds. Just because you index doesn't mean you are not volatile.

[jIM_Ohio]

Originally Posted by crabbypatty

Thanks for the input guys.

I know this may be silly but it's a good example of how pychological factors influence money decisions:

I've heard people talking about T. Rowe. But I can't invest with them. B/c I know someone who is a manager there that is absolutely horrible with their finances. Creditors calling, bankruptcy etc. I am not exactly sure of this person's position, but I know they are a manager. The thought that T. Rowe trusts this person with anything financial scares me and therefore I can not trust them with my money. It's silly b/c the person I know may not have anything to do with managing funds etc. But it's a psychological hangup I have.

I want the money to be in their name, it is theirs. However, if it grows to a significant amount maybe I could convert it to a trust so that they can get it later then age 18? It isn't for education b/c they already have accounts for that. This would be for a house etc. And we've got a long time for it to grow.

Check out Dodge and Cox, Vanguard (I think you mentioned them earlier), Royce and I could come up with a few others. Yahoo finance might have other selections.

[MonkeyMama]

You can report the kids' income on your tax return actually - the first $850/year or so is tax-free and not much hassle to add it to your return. A small portion after that is taxed at the lowest 10% rate. I am not sure off the top of my head what all the threshholds are and how much income the child needs before filling out their own tax return. But I haven't done many tax returns for clients with kids lately - years ago we had to do separate returns for each. But I just did my first tax return reporting the kids' $300/each investment income on their parent's return - no taxes. It was nifty - makes me more willing to invest my kids' money now that I know I don't have to fill out 3 tax returns every year. Just makes it that much easier.

You know once in a blue moon something in the tax law makes life easier, as opposed to the usual making it more complicated.

[MonkeyMama]

"Some parents save their child from tax-filing duties by reporting the youngster's investment income on the adults' return. This is an option if a child's earnings are only from interest and dividends, including capital gain distributions, and are less than $8,000. In these cases, the child's investment income is detailed on Form 8814, Parents' Election to Report Child's Interest and Dividends, and included with the parents' tax return. This way, the child doesn't have to file a return or Form 8615."

First $850 is tax-free in 2007, second $850 is taxed at 10% rate. Unearned income over that is taxed at the parents' top tax rate.

The kiddie tax rules changed a lot this last year, and the threshold has been going up. Who knows where it will all land for the long-term...

[cheapdoggy]

You could also buy stocks if you want...
I put my kid's money in individual stocks...Stuff they can understand such as McDonalds Disney and Chuck E Cheese. We've done OK with them and Scottrade has no minimums as far as I can remember. McDonalds is also a drip stock

[LuxLiving]

DRIPS were the way we went. One that we bought was the local utility company - the boys got such a kick out of seeing "their" trucks driving around town.