Investment for Kids

[Eagle]

So we think we're close to pulling the trigger on investing 1k for each kid (we have 2) into a mutual fund. We've looked at the Vanguard Star Fund...

Anyone have any experience with Vanguard Star?

Is this a good idea or is there something else we should consider?

Thanks in advance.

[disneysteve]

What's the purpose of this money? Is it for college? If so, why are you considering this and not a 529 plan to take advantage of the tax-free growth?

It is a perfectly good fund and the lowest minimum Vanguard offers so certainly nothing wrong with it on its own.

[Eagle]

This is money we'd like to save for the kids but not be locked into a 529. I imagine it's something we'll give to them when their 18 or 21. The purpose of the money would be whatever they deem important. We plan on encouraging college but perhaps this might go towards their first vehicle.

We plan on encouraing relatives to give towards these 2 funds instead of always giving toys or stuff they don't really need (battery operated, stuffed animals, etc.).

[Like2Plan]

Eagle,
Are you going to set up a custodial account in each of the kid's names?

[Eagle]

Eagle,
Are you going to set up a custodial account in each of the kid's names?

That is a good question. I guess the answer is yes? What are the down-sides of this?

[Like2Plan]

That is a good question. I guess the answer is yes? What are the down-sides of this?

Custodial Account:
1. Once you have made the gift, you can't take it back. You can't retitle to another child.
2. Spending out of a custodial account has to meet certain criteria: Custodial accounts, the spending rules
3. You have fiduciary responsibilities as the custodian.
4. Once your child reaches the age of majority (either 18 or 21 depending on the state), the trust ends and the money can be used any way the child sees fit.
5. Unexpected tax consequences. The kiddie tax laws are such that over a certain amount of unearned income, the earnings are taxed at the parent's rate. (I believe currently the first 1K of unearned income is not taxed, then the 2nd thousand is taxed at the child's rate and then above that the earnings are taxed at the parent's rate. If the child has earned income in the mix, I believe the threshold is lower)
6. Savings in your child's name may impact financial aid, if that is a consideration. A higher percentage of assets in the child's name is expected to be used for college than if the same money was in the parent's name.

[feh]

So we think we're close to pulling the trigger on investing 1k for each kid (we have 2) into a mutual fund. We've looked at the Vanguard Star Fund...

Anyone have any experience with Vanguard Star?

Is this a good idea or is there something else we should consider?

Thanks in advance.

VGSTX would be fine. Another option would be to use a target date fund like VTTHX, which would allow you to be more aggressive while they're young.

[disneysteve]

I imagine it's something we'll give to them when their 18 or 21.

If you want them to have the money at 18, a custodial account is fine. If you might not want them to have it until later, keep it in your own name. I don't know how old the kids are now but if they are young, keep in mind that things can happen and at 18, you may not want them to have this money, or at least not all at once.

[MonkeyMama]

Agreed with the others.

We always start with STAR when we open a new account, due to the low minimum. But if the kids are very young, I agree that it would be wise to invest more aggressively. We've started with STAR and then shifted to target date fund when we had $3,000, for our own kids. (Gives you more diversifying with a smaller balance, versus having enough to buy several different mutual funds).

What we have done is kept gift money in our kids' names, but any money we save up personally we just keep in our name. That way we retain complete control and flexibility with that money. Which I prefer. But, we certainly considered the financial aid, tax and other ramifications of our choices.

[Eagle]

Custodial Account:
1. Once you have made the gift, you can't take it back. You can't retitle to another child.
2. Spending out of a custodial account has to meet certain criteria: Custodial accounts, the spending rules
3. You have fiduciary responsibilities as the custodian.
4. Once your child reaches the age of majority (either 18 or 21 depending on the state), the trust ends and the money can be used any way the child sees fit.
5. Unexpected tax consequences. The kiddie tax laws are such that over a certain amount of unearned income, the earnings are taxed at the parent's rate. (I believe currently the first 1K of unearned income is not taxed, then the 2nd thousand is taxed at the child's rate and then above that the earnings are taxed at the parent's rate. If the child has earned income in the mix, I believe the threshold is lower)
6. Savings in your child's name may impact financial aid, if that is a consideration. A higher percentage of assets in the child's name is expected to be used for college than if the same money was in the parent's name.

Something to consider for sure. Maybe we'll just keep it in our name.

[Eagle]

If you want them to have the money at 18, a custodial account is fine. If you might not want them to have it until later, keep it in your own name. I don't know how old the kids are now but if they are young, keep in mind that things can happen and at 18, you may not want them to have this money, or at least not all at once.

This is true DisneySteve. We may want to just keep it under our (my or DW) name.

[Eagle]

Agreed with the others.

We always start with STAR when we open a new account, due to the low minimum. But if the kids are very young, I agree that it would be wise to invest more aggressively. We've started with STAR and then shifted to target date fund when we had $3,000, for our own kids. (Gives you more diversifying with a smaller balance, versus having enough to buy several different mutual funds).

What we have done is kept gift money in our kids' names, but any money we save up personally we just keep in our name. That way we retain complete control and flexibility with that money. Which I prefer. But, we certainly considered the financial aid, tax and other ramifications of our choices.

Good idea regarding gift money and money we personally save. That way there is some money to teach about investments and which they control. The rest we retain control of depending how things go when they're 18.

[snafu]

I remain ever grateful to my parents who set up custodial savings a/c for each of their grandkids before their 1st birthday. We were the custodians and always added all cash gifts, income tax deductions, and as they got older about 50% of their small earnings. The boys were also benefactors from their great grandparents and grandparents estates. Once sufficient funds accrued, we opened a linked Mutual Fund for each child in a DCA program. Over the years allocation was adjusted to reflect the economy and risk factors.

Our laws are different as they needed SIN [SS] cards to play in sport leagues. From that point all earnings and capital gains were attributable to DSs. Over the long term there was sufficient sums to pay for University and gap year to travel. I think there is enough money remaining for DS1 to do a Master program if he decides to do so in 3 years. Each has a small student loan because they have some kind of wacky grant that forgives student loans up to a specific sum.