1st Baby Due 10/2022 = Saving for childs future, but where to start these days?

[amarowsky]

Hey Gang!

Happy to report, my wife and I have our 1st kiddo due mid/late 10/2022! (we lucked out after nearly 3 years of trying )

Some family has provided some gifts, and we also want to start saving for this kiddo.

Request:
1) Any recommendations at what type of accounts to fund 1st, when saving for a child's future? (both college/education earmarked and other .)

[james.hendrickson]

Hey Congrats!!!!!! Wonderful news.

I'd consider a 529 plan for the new arrival.

And once they start to earn income, a custodial IRA would also be a good idea.

[kork13]

Congrats!!!

What we've done for each child was setup a 529 & UTMA at birth, then throw money into those -- emphasis on the 529. So for example, every month we put in $100/mo + $10/mo/year of age (my 7y/o gets $170/mo). Then the UTMAs always get $30/mo + any birthday/gift money they receive ... at least until they're old enough to manage that gift money themselves (with that 7y/o is approaching).

Note that the 529 is limited to use for education, UTMA is wide open. That way they'll be covered for education costs, but will also have the UTMA available for either more education needs, or a car, or a house, or whatever else they might need.

Likewise, understand how ownership works -- 529s, you are the owner with the child as a beneficiary. UTMAs, the child owns the money, you're just a custodian until their 18th-21st birthday (state law dependent), weekend they legally can/must assume control of it. (but if my kids are self-destructive at that time, I guarantee you they money will disappear into a hole).

[Jluke]

Credit union account
capital one account
E*Trade for investments

no 529.

choose accounts wisely as the money will be theirs at the right age if UTMA. It would be illegal for you to move that money to your account (I am not a lawyer or tax professional) just to keep it away from them.

kids money can be used for certain situations

[disneysteve]

Congratulations!

If you want to save for education, use a 529, especially if you get a state deduction but even if you don't. One advantage, as kork13 mentioned, is the money remains yours so your kid can't turn 18 and decide to blow it all.

If you want to save for other purposes, then a custodial account with a high yield online money market like Ally or similar.

If you're able, do some of each. I wish we had started DD's 529 when she was born but I was busy paying off my own education at that point. We didn't start until she was 7 I think but still managed to accumulate over 60K which helped tremendously when college rolled around.

[Drake3287]

Congratulations! Surprisingly, saving for college isn't as hard as it seems if you religiously put money aside each month. My secret to paying cash for all 3 of my kids college education came by doing just this. 529 accounts are a good way but you have to remember that it's still the stock market with risks, anything can happen. When I started I was using higher paying CD's and 529 accounts were new still.

The secret for us was to put aside a small amount of money from each of our paychecks, I'm talking something as small a $100. dollars from my check and maybe $50. from my wife's. After each child we simply increased this amount per child, so something like $300. from my check and $150. from my wife's. Over the years we also increased this amount a little as we both received pay raises.

We did this religiously for 25 years until all three of them had graduated. Over those years that small amount out of each paycheck mushroomed to several hundred thousand dollars. I easily wrote a check for anything that was needed for college. Something few parents can ever do. And the best part, after the last one graduated, that money we had been investing for college all those years was like a huge pay raise for us when it ended.

[disneysteve]

Congratulations! Surprisingly, saving for college isn't as hard as it seems if you religiously put money aside each month. My secret to paying cash for all 3 of my kids college education came by doing just this. 529 accounts are a good way but you have to remember that it's still the stock market with risks, anything can happen.

You can invest a 529 account as aggressively or conservatively as you’d like. And you can adjust over time as college gets closer. There are even target date options just like for retirement that automatically get more conservative as the kid ages.

[srblanco7]

Congratulations!! First priority for us was 529 plans and as they have gotten older and started working part time jobs we've added roth iras.

[amarowsky]

Thank you all for providing info!

Looks like in my State (Michigan) we have 529-MESP VS 529-MET. The former being more flexible, and the ladder (MET) being less flexible but stronger leverage to buy "today's" tuition costs VS the future costs.


MESP (Pasted) = The Michigan Education Savings Plan (MESP) is a 529 college savings plan. The biggest benefit that the MESP offers over other savings accounts is the tax benefits. When you contribute to the MESP you are able to deduct Michigan state taxes on up to $10,000 of contributions per year. Like a Roth IRA, the funds are invested and grow for you tax-free. The MESP can then be withdrawn to pay for college costs completely tax-free. The other nice thing about the MESP is that your child can attend any school in the country and is not limited to Michigan schools.

The biggest drawback of the MESP is the restrictions on how the funds can be used. In order to get the tax benefits of the MESP, the funds must be used for college costs. Any other use of the funds and there are taxes and penalties on any of the tax-free growth on the account. If your child doesn’t end up going to college or if he needs the funds to help pay for other expenses, the taxes and fees could really add up.


MET (pasted) = The Michigan Education Trust (MET) is a prepaid tuition program. You are buying college credit hours at today’s rates and not the higher college costs in the future. You can think of it also like a savings account, in which your savings grows at the rate of college inflation. As of June 2019, to buy a MET Full Benefit credit hour it would cost you $612 and a full year costs $18,360. If you do believe that college costs are going to continue to increase at a high level, you may find that the MET is a great investment. Also, like the MESP you can deduct state taxes on the contributions that you make. The MET does come with its drawbacks.

The main drawback of the MET is that if your child chooses a school outside of Michigan or doesn’t attend college, you could lose a significant amount of your investment. For example, if your child doesn’t go to college and you request a refund you would currently only receive an amount equal to the lowest tuition of Michigan 4-year Universities. The lowest 4-year tuition is currently only $11,082 per a year of college purchased. If your student goes out of state or chooses an in-state private school, MET will cover the average cost of a public Michigan college which will probably not cover the cost of tuition.


MESP will allow me to keep some costs un-earmarked, and possibly pivot to an eligible trade school, should they want to go that route. Or at least use it on some education expenses alongside computer, office, and other related expenses.

UTMA = After learning that it is not tax-deferred when putting in, this has slid a bit down my list of interest.

Traditional / Roth - IRA = Been thinking about these more-so..... Seems w/ a Traditional IRA, my child would be able to take $10k out towards a house purchase + the money I put into the account *should be tax deferrable.
Roth - This idea is much more simple and tax preferred for the kiddo. Plus before 59 1/2 , they would be able to pull out as much as they want/need to secure a primary residence while they're young enough. I kinda link this route, despite it not being tax deferred to my income taxes, while it's accruing.


Going Forward:
I'm likely leaning towards the 529-MESP + some form of ROTH. Get enough in the MESP to give the kiddo options, and beef up the ROTH IRA if everything goes well on my earning side, so they can get a home early (buying a home early for me was a game changer @ setting the course of my life).

The $10k in tax write offs is quite helpful to reduce my income. MET..... while better leverage specifically for tuition, I'm really not sure I'm going to "push university" hard on my kids.... I really don't know if it's wise or not these days, depending on what my future child's personality is.

Back in the 2005-2016 block when I went to school, it was MUCH cheaper and less risky to take on a loan for career-based education. I lucked out and paid between $38-42k ish for my full B.A. degree. From what I'm reading now, my entire B.A = slightly less than 1 full year w/ some extra expenses (25k Michigan State, like 30K+ for UofM) . I did community college --> Uni route (Wayne state & Eastern Mich)

[Jluke]

When you say Roth. Is that for you or the kid?

the kid can’t have one until they generate income.

UTMA- your child will probably not have to file a tax return so shouldn’t be a major deterrent.

[amarowsky]

When you say Roth. Is that for you or the kid?

the kid can’t have one until they generate income.

UTMA- your child will probably not have to file a tax return so shouldn’t be a major deterrent.

it would be for child, when they're of age to earn some $$$. But this does severly delay saving on their behalf.... May have to just start a MESP until then.

I can't find the rules for a traditional-IRA for a child (not sure if your able to do set one up on their behalf....). If so, it would be a convenient way to tamp down income tax... Does anyone have any info on this?

[disneysteve]

I can't find the rules for a traditional-IRA for a child (not sure if your able to do set one up on their behalf....).

You can open a custodial IRA (traditional or Roth) for your child as long as THEY have earned income. I did this with my daughter when she was 16 or 17 with babysitting money. When she turned 18, we ended the custodial arrangement and the account became hers.

[amarowsky]

MESP it will be until this kiddo start's making some mooolah!

[kork13]

MESP definitely seems like the best option for school expenses.

I'd shy away from doing a Roth IRA for a child only to offer it up for them to draw from as required... bad habit to get into with retirement accounts. (though a GREAT idea to start one once earning income...just leave it alone)

Just to comment on the UTMA -- it's basically just a standard taxable investment account that happens to have you on as a custodian. However, as JLuke referred to, you initially wouldn't have any taxes from that account. It's the child's account, so their "taxes" are zero for the first $1100/yr of realized income (capital gains) from the account. The next $1100/yr is taxed at the child's rate (typically 10%, unless they have a bunch of other taxable earnings somewhere else). Realized income above $2200 is taxed at your normal tax rate..... And while they're growing up, unless you make a withdrawal (sell at a gain), the only income they'd have on that account is dividends and maybe a tiny amount of STCG from normal mutual fund churn.... Which means that unless the UTMA had >$35k earning dividends above 3%, you'd pay zero taxes on that account, let alone the next level of income taxed at the child's 10% rate.

I just like having the UTMA growing slowly on the side to be some readily accessible flex cash for their use in the future.

[Drake3287]

You can invest a 529 account as aggressively or conservatively as you’d like. And you can adjust over time as college gets closer. There are even target date options just like for retirement that automatically get more conservative as the kid ages.

Very true, it's just that I had started saving before 529's were even around and CD's were paying high rates. I did later open a couple of 529's but in general, it was old fashion saving.